Ramping up war fever against Iran, Donald Trump seems to have jerked his erratic attention span away from his campaign to overthrow Venezuela’s Nicolás Maduro. The embarrassing fiasco of pretender Juan Guaidó’s failed coup last month temporarily frustrated Trump’s search for an imperial triumph abroad to divert attention from the relentless piling up of legal troubles at home.

But the administration’s hawks, led by National Security Adviser John Bolton, special adviser for Venezuela Elliot Abrams, and Florida GOP Senator Marco Rubio, have certainly not given up. So, no one should be surprised when the blustering Trump once again threatens the Venezuelan people with war unless they rise up and throw out their president.

But we might be a little more curious about the enthusiastic backing Trump has enjoyed from the prominent Democrats and mainstream media who have otherwise denounced him for undermining the post–World War II liberal world order—tearing up treaties, disdaining democracy, and holding international law in open contempt.

Joe Biden, Nancy Pelosi, Chuck Schumer, Amy Klobuchar, Kirsten Gillibrand, Richard Durbin, The New York Times, The Washington Post, and PBS commentators are among the leading liberal internationalist choristers chanting their support for Trump’s right to impose regime change on another people’s country.

They assure us, of course, that they are not promoting war. Rather, they support the presumably more “moral” policy of harsh sanctions, i.e., an expectation that strangling the Venezuelan economy will cause enough pain and misery so that Venezuelans will throw out Maduro themselves. Economists Jeffrey Sachs and Mark Weisbrot estimate that 40,000 Venezuelans died as a result of US sanctions in 2017 and 2018. Trump has dramatically tightened them this year. And if that doesn’t work?

Secretary of State Mike Pompeo tells us that Trump also prefers peace, but “military action is possible.” And “if that’s what’s required, that’s what the United States will do.” Amen, says Senator Klobuchar; “you always leave things on the table,” she said. History suggests that when you put guns on the table, the trigger-happy (e.g., Bolton and Abrams, an architect of the 1980s contra wars in Central America) are likely to manufacture an excuse to use them. Pompeo says Trump doesn’t need congressional approval to send in the Marines, anyway. This limits regime-change Democrats to the role of softening up the public for Trump’s jihad.

Trump claims the support of an international “coalition of the willing,” which of course we also corralled for the wars in Vietnam, Afghanistan, and Iraq. This year’s group includes some small client states; the newly ascendant right-wing leaders of Brazil, Argentina, and Colombia; and intimidated Europeans who will give Trump his way in Latin American to avoid his ire over their lack of enthusiasm for his warmongering against Iran and his off-again, on-again romance with Vladimir Putin. Like Trump’s Democratic supporters, the Europeans say they are not necessarily endorsing war.

But the bedrock rule of international law is clear. As the charter of the Organization of American States, which the United States has signed, declares, “No State or group of States has the right to intervene, directly or indirectly, for any reason whatever, in the internal or external affairs of any other State.” [Emphasis added.]

The exception is self-defense. The notion that Venezuela is a threat to the United States is obviously absurd. Nor can anyone seriously believe Venezuela is planning to invade any of its neighbors.

Hugo Chávez, Maduro’s mentor and predecessor, was a pain in the ass to the US foreign-policy apparatus: opposing the war in Iraq, selling discounted oil to Cuba, and making speeches about US imperialism in Latin America. But neither Chávez nor Maduro was, or could have been, a serious constraint on US global hegemony.

As for the ominous references to Russia’s getting a “foothold” in the Western Hemisphere, the Russians have neither the capacity nor the stomach for challenging US military superiority in the region. They will continue to kibitz, but after their Cuban experience, Putin has little interest in assuming responsibility for an even larger economic basket case.

Still, isn’t the outside world morally obliged to act when entrenched leaders commit genocide or similar crimes against their own people? Yes. And the usual examples are Hitler, Stalin, Pol Pot, and the current rulers of Myanmar.

Nicolás Maduro in recent years has certainly become an authoritarian ruler—harassing political opponents, refusing to recognize the opposition-controlled national assembly, and treating dissenters as enemies of the state. But he is hardly in Hitler’s class. Nor is he in the class of some of Washington’s closest friends. The US government–funded center-right organization Freedom House lists 13 countries where freedom is most suppressed. Venezuela is not on the list. Of the eight not in the throes of civil war, four—Saudi Arabia, Tajikistan, Uzbekistan, and Turkmenistan—are close allies or recipients of US military and economic aid. Thirty-six countries have lower Freedom House scores than Venezuela.

Trump, who still has a cloud over his own election, claims that Maduro rigged the voting in 2018. There’s little doubt that he did, using government power to muzzle the opposition and to buy votes in a low-turnout election. But the major cause of the low turnout—46 percent, down from 80 percent in the 2013 election that Maduro clearly won—was the Trump-supported boycott of the election by some of the opposition parties. The Trump administration even reportedly threatened the leading anti-Maduro candidate, Henri Falcón, with sanctions against his businesses if he ran. And then, earlier this year, Trump declared a formerly obscure hard-right politician, Juan Guaidó—elected to the National Assembly in 2015 by the same system that elected Maduro—as the “legitimate” president.

For 20 years, beginning long before Maduro turned autocrat, the US government has been trying to crush Chávez’s “Bolivarian Revolution”—including encouragement of a failed military coup in 2002. But Chávez remained popular because he redirected oil revenues from rich oligarchs and foreign investors to the majority of Venezuelans, who are poor. Oil money was used to provided housing, clean water, schools, health programs, music education—and yes, access to polling places in poor neighborhoods. In 2012, Jimmy Carter told his Carter Center, “As a matter of fact, of the 92 elections that we’ve monitored, I would say the election process in Venezuela is the best in the world.”

The other charge against Maduro is that he has mismanaged the economy. Also true. He denied the state oil company the investments needed to maintain its production, unnecessarily alienated his creditors, and kept spending money when oil prices and government revenue declined.

But Venezuela is not the first oil exporter to have been driven into a debt crisis when prices fell. Those that are not on the US enemies list, like Mexico in the 1980s and again in the 1990s, are able to refinance their debt with private banks and the IMF. But Washington has effectively blocked such aid to Venezuela, has restricted its oil markets, and has frozen its assets in the United States, handing some of the money over to Guaidó. The combination of sanctions and the cut-off of credit turned a floundering economy into a drowning one.

In any event, economic mismanagement hardly justifies intervention by foreigners, much less by Donald Trump, the king of corporate deadbeats. So why the willingness of the Democratic rule-of-law internationalists to join Trump, Bolton, Pompeo, and Abrams in their unlawful and unhumanitarian assault on Venezuela?

Oil may be part of the answer. Venezuela sits on the world’s largest proven oil reserves. And Guaidó has promised to give control of it back to the international oil companies. The industry gives more money to the Republicans, but they spread their largesse. In the 2018 cycle, Texas Senator Ted Cruz received more money from the oil and gas people than anyone else—and his Democratic opponent, Beto O’Rourke, came in second. More importantly, perhaps, the industry supports the think tanks and nurtures the policy mavens who set the parameters for foreign-policy groupthink in Washington.

As we have learned from the debacles in the Middle East, the lure of oil profits and the engrained habit of the US governing class of demanding the right to determine how other countries should be run is a lethal combination. No matter how often our intelligence operations flop, exposing our ignorance of what is going on in other countries—the latest being the failure of Guaidó’s US-supported April coup attempt—the consensus that Washington knows best remains mostly unshaken inside the Beltway.

Despite the incoherence stemming from Trump’s unbalanced mind and his advisers’ rigid ideology, they may well prevail in the short run. It is hard to imagine that Maduro can survive the relentlessly tightening economic garrote, even without a US-supported invasion from the outside.

Then what? There would be more foreign investment in the oil industry, and a little more foreign aid—although not much coming from Trump. But with Venezuela’s plutocrats in charge, progress toward social equality will certainly be rolled back, leaving widespread, simmering resentment that the restored upper class will have to repress—at least as harshly as Maduro has repressed his enemies.

Civil war is also possible. The Venezuelan army, the more than 6 million people who voted for Maduro, and a large swath of Latin America’s population may not sit still for yet another Yankee intervention.

Hope may lie in reluctance from the Pentagon, which is already feeling overstretched in the Middle East and advises caution. And when denied an easy victory, the moody Trump often gets cold feet.

But the march to the brink of war often spins out of control. If we go over the edge in Venezuela, we can expect Trump’s Democratic enablers to explain later why they beat the drums for regime change—as did Clinton, Biden, Kerry, and others who supported George W. Bush’s Iraq War. We’ve heard it before: “Sorry, we really didn’t mean for it to turn out that way.”

]]>https://www.thenation.com/article/archive/venezuela-democrats-trump-sanctions/Trump Is Laying a Trap for Democrats on Immigrationhttps://www.thenation.com/article/archive/trump-immigration-democrats-2020-election/Jeff Faux,Jeff FauxApr 2, 2019

Nancy Pelosi and the Democrats thoroughly outplayed Donald Trump in January’s legislative battle over funding for his border wall; he didn’t get an additional dime. So when Trump sent up his annual proposed budget asking for still more, Democrats scoffed. “This ridiculous request,” said Representative Nita Lowey, chair of the House Appropriations Committee, “is not worth the paper it is written on.”1

But Trump isn’t aiming for a budget victory; his purpose is to keep the fight going in order to make illegal immigration a wedge issue in his 2020 reelection campaign.2

The Democrats’ insistence on compassion for the undocumented gives them the moral high ground in this debate. Trump’s proposed wall is not popular, and most Americans do not like his separation of immigrant children from their parents or his deportation of the many undocumented people who have worked and paid taxes here for years. And they sympathize with the students and others who fall under the Obama-era protections of DACA (Deferred Action for Childhood Arrivals), whom Trump also threatens to deport.3

But a majority of Americans—in numbers well beyond Trump’s base—also want immigration laws to be strictly enforced and the border sealed against illegal crossings. A 2018 Harvard/Harris poll reported that 70 percent of voters support more restrictive laws, with 64 percent—including 53 percent of Latinos—in favor of sending back people who cross the border without papers. And although most blamed Trump for the government shutdown, when that skirmish was over, his favorability ratingsrose by three points.4

Trump is betting that he can again use anxieties about immigration to stoke enough class anger to win the Midwestern battleground states that he needs for reelection. “No issue better illustrates the divide between America’s working class and America’s political class,” he signaled bluntly in February’s State of the Union address. “Wealthy politicians and donors push for open borders, while living their lives behind walls and gates and guards. Meanwhile, working-class Americans are left to pay the price for mass illegal immigration—reduced jobs, lower wages, overburdened schools, hospitals that are so crowded you can’t get in, increased crime, and a depleted social safety net.”5

To hammer home that message, Trump already has an enormous war chest and an experienced and ruthless propaganda machine that includes Fox News, the most popular cable-news channel in the country.6

The GOP has been honing its skills in the politics of fear and division for decades, from Ronald Reagan’s racist “welfare queen” trope in 1980, to George H.W. Bush’s 1988 campaign, which smeared Michael Dukakis by playing on racial fears involving the furlough of convicted black murderer Willie Horton, to the GOP’s fraudulent assault on the war record of John Kerry in its 2004 campaign to win a second term for Bush’s draft-dodger son.7

The inflammatory ads attacking immigrants that appeared at the end of the 2018 midterm elections were a warm-up for what’s to come. TV and social media will be flooded with images of immigrants—doctored to make dozens look like thousands—throwing rocks at the Border Patrol or rushing to scale the fences, as well as police mug shots of immigrant Latino criminals. The US-bred, Salvadoran-based MS-13 gang might well become the Willie Horton of the 2020 election.8

The goal will be to fix in voters’ minds not just that the Democrats are weak on crime (i.e., illegal immigration) but that they’re beholden to activists who champion “open borders.” And many will be receptive to this claim: A 2018 Quinnipiac poll found that voters thought the Democrats exploited the immigration issue for political gain more than Trump, by 60 to 53 percent.9

The Democrats are thus in a political bind. They need the Latino vote, so they have to defend immigrants against Trump’s inhumanity. But as they do, they risk losing credibility with voters who are not racist or xenophobic but who suspect that Democrats care more about protecting people who cross the border illegally than they do about securing it.10

On the question of border security, Trump is loud and clear: Keep illegal immigrants out. As far as the 2020 campaign is concerned, whether he actually makes any progress in building his wall is irrelevant; it’s much more important as a symbol of his supposed commitment to law and order.11

Many Democrats, on the other hand, are unclear where they stand. When pressed, they offer measures that could be described as “Trump Lite”—a little more money for the Border Patrol, a small fence rather than a big wall, and carefully modulated assurances that of course they favor border security. Outside the liberal enclaves, Democrats try to change the subject, as Pelosi and Senate minority leader Chuck Schumer did by focusing their budget fight with Trump on the government shutdown rather than immigration. “Don’t take the bait,” Pelosi warned in the closing days of last fall’s midterms, advising Democrats to talk about health care instead.12

ntil recently, Democrats might have counted on the issue going away by itself. Unauthorized border crossings fell substantially from their highs in the late 1990s and early 2000s, largely because of a drop-off in migrants from Mexico. But the numbers from Central America—especially Honduras, Guatemala, and El Salvador—have risen. Some 76,000 undocumented migrants crossed the border in February, an 11-year high. Forecasts are for another 180,000 by May.13

The immigration system on our southern border is collapsing. Courts are swamped with a backlog of cases estimated at 850,000. Detention centers are overwhelmed and understaffed. Children are lost, women are abused, and busloads of confused migrants and refugees are dumped on the street and told to come back later for their hearings. Some show up, some don’t.14

Regardless of whether the numbers rise or fall over the coming year, attempts at evasion or Trump Lite will not be an option in the face of the president’s fearmongering blitzkrieg. To meet it, Democrats need to gain clarity and credibility and go on the offensive.15

First, Democratic candidates must make clear that they are committed to limiting immigration to what is legal (currently over 1 million people per year). Second, they need to counterattack. Democrats should be using the rising numbers of illegal border crossings as evidence that Trump’s hard line has failed. They need to make clear that the irrational “catch and release” policy that he rants against stems from our failure to provide the judges and other legal infrastructure needed to process claims quickly. Third, Democrats need a broader narrative to connect the dots between immigration and foreign policy. The current debate is US-centric, focused entirely on domestic policies: what to do about the undocumented once they arrive here. But there can be no enduring solution to the problem unless we also ask why they are coming from there.16

Honduras, Guatemala, and El Salvador are de facto US colonies, places where oligarchs have long exploited their people in partnership with American capital. They are suffering the aftereffects of brutal civil wars stoked by Washington’s paranoia toward leftist political movements. The region has also become a major route for the shipment of drugs from South America to the United States. Attracted by the enormous profits, oligarchs have collaborated with narcotraffickers and other criminal gangs that terrorize citizens through robbery, extortion, rape, and murder.17

Washington’s so-called War on Drugs reinforces the rich and powerful in these countries with money and military equipment, which is often used to suppress dissent rather than snare criminals. Thus, for example, in 2009 the Honduran military kidnapped the elected president—whose modest social programs providing food and education to the poor had enraged the upper class—and, after refueling at a US military base, shipped him out of the country. Protesters were beaten, jailed, or killed. The “compassionate” Obama administration endorsed this coup, and the “law-and-order” Trump administration continues to support the violent kleptocracy that has been in power ever since. Five years after the coup, the number of Honduran children illegally crossing into the United States jumped by more than 1,200 percent.18

Progressive Democrats should demand that we stop supporting regimes that are driving immigrants to our doorstep. A policy of zero tolerance for corruption and oppression should apply to any aid, and the US national-security apparatus needs to cleanse itself of its unhealthy relationship with Central American militaries. Given that there is no conceivable military threat to the United States from the region and that none of these countries threaten their neighbors, we arguably do not need to have military bases or advisers there at all.19

Conditioning foreign aid on wholesale political reforms and breaking up the cronyism between the US and Central American militaries would give democracy some political room to grow. And having helped to impoverish the people of these countries, we also need to rebuild their hopes for a better future. The newly elected president of Mexico, Andrés Manuel López Obrador (popularly known as AMLO), argues that investing in jobs is the real answer to the drug violence and out-migration that drains these economies of their hardest-working and most ambitious people. He has outlined a long-term social- and economic-development plan, a Mexican version of the Green New Deal proposed by progressive US Democrats (it’s worth noting that Franklin Roosevelt is one of AMLO’s heroes). But Mexico cannot change the region’s direction by itself. Despite his history as a critic of US meddling, AMLO has proposed a joint US-Mexican Marshall Plan for Central America. Given the United States’ history in the region, Mexican leadership in such a project would be essential.20

Trump has signaled support for this idea in principle. But, as usual, it’s a trick: He promises that the private sector would put up the money, while his own 2020 budget cuts foreign aid to Central America by 25 percent.21

Foreign aid is not popular, of course. But a generous US contribution to this effort would cost a lot less than Trump’s border wall. Its domestic purpose would be clearer to the average American voter than the abstract geopolitics used to rationalize most foreign-aid programs. A new narrative on immigration would also contribute to the search for a progressive foreign policy in the post-Trump era.22

]]>https://www.thenation.com/article/archive/trump-immigration-democrats-2020-election/Why Are US Troops Still in South Korea, Anyway?https://www.thenation.com/article/archive/why-are-us-troops-still-in-south-korea-anyway/Jeff Faux,Jeff Faux,Jeff FauxMar 6, 2018

For the past year, Donald Trump and his chief advisers have responded to North Korea’s nuclear-weapons program by warning that “everything is on the table”—including war. That is not true. Missing from the table is the one option that could avoid catastrophe: the drawdown and eventual withdrawal of the US military encirclement of North Korea.

A majority of Americans, according to the polls, oppose the proliferation of US military interventions abroad. Yet, as Gallup reports, a majority also support a preemptive attack on North Korea if “the U.S. cannot achieve its goals by more peaceful means first.”

“Goals” in this case are assumed to be defensive, i.e., to prevent the North from launching a nuclear first strike as soon as it perfects a missile capable of reaching us.

It’s no surprise that Americans feel so threatened. Long before Donald Trump began trading schoolyard insults with North Korean leader Kim Jong-un, Trump’s predecessors—Clinton, Bush, and Obama—relentlessly demonized North Korea as a rogue state run by a dynasty of brutal tyrants who are out to destroy us. The presumed menace justifies our garrison of some 25,000 troops in South Korea, 65 years after the Korean War and a more than a quarter-century since the Cold War ended.

It also justifies the US refusal to take up Kim’s offer to negotiate. Our response has been: We don’t trust you, so first give up your nukes—and then we’ll talk. Kim’s response: I don’t trust you. Once I give up my nukes you’ll come after me like you came after Libya’s Moammar El-Gadhafi after he stopped building his.

A decade of harsh economic sanctions has not forced Kim to back down. So the lunatic logic of this standoff is pushing the public into accepting that we must destroy his missiles before he uses them on us.

We’re not talking here about some antiseptic surgical drone operation. As Secretary of Defense Jim Mattis wrote two Democratic congressmen last October, “The only way to ‘locate and destroy—with complete certainty—all components of North Korea’s nuclear weapons programs’ is through a ground invasion.”

Since China would clearly not accept an occupying US force across its border, such an effort by Trump to clean out Kim’s missiles could quickly topple the dominos into a Korean War Redux—this time with three nuclear-armed combatants.

Cooler heads may in the end prevail. But with both sides’ front-line military on hair trigger alert, the chance of war by accident or mistake has also escalated. A high-level North Korean defector told a congressional committee last November that their officers “are trained to press the button without any further instructions from the general command if something happens.”

Yet, as the clock ticks toward doomsday, Congress, the mainstream media, and therefore the public remain passive—stupefied by the cartoon image of the monstrous Kim, lusting to drop his bomb on us as soon as he can deliver it.

In the real world, the probability that Kim would initiate a nuclear strike on the United States is zero. The United States has some 1,400 nuclear warheads ready to fire, and another 2,600 that could be quickly deployed. Within hours, North Korea would be an uninhabitable wasteland, with Kim and his regime obliterated.

The North Koreans know this. So do serious observers of their behavior. As The New York Times reported last August, “scholars agree [Kim] has repeatedly proven himself rational and focused on his government’s survival. His country’s weapons programs are designed to deter a war, not start one.”

The reason that he threatens us here is that we threaten him there.

American presidents regularly vow to destroy Kim Jong-un’s country. In addition to permanent military bases in the South, they have surrounded him with a menacing armada of missiles, drones, planes, and warships—with regular violations of North Korean airspace at high altitudes. And he is the target of an annual, two-month long US–South Korean military exercise involving tens of thousands of troops practicing how to “decapitate” him.

After a meeting with Kim in Pyongyang on March 5, South Korean envoys reported that “the North Korean side clearly stated its willingness to denuclearize. It made it clear that it would have no reason to keep nuclear weapons if the military threat to the North was eliminated and its security guaranteed.”

So, what is the US military doing there in the first place? Citizens of our democracy looking for an answer soon find themselves lost in a fog of babble about America’s “vital interests.”

We claim that we are there to defend South Korea. But a nuclear attack on the South makes no sense. Seoul and Pyongyang are only a two-hour drive apart. Nuclear war anywhere in Korea would contaminate the whole peninsula.

What about a conventional invasion from the North? After the Korean War cease-fire in 1953, this was a legitimate worry. North Korea was larger and more industrialized than the mostly rural south. But today, South Korea has roughly 50 times the GNP of the north, is a manufacturing powerhouse, and it spends almost five times as much on its military. The uniformed North Korean army is numerically superior but lacks the armament and logistic technology of the South. Kim’s air force and navy are even more obsolete and no match for the advanced South Koreans. Retired US Army general James Marks, a former senior intelligence officer for Korea, says that after a surprise attack, the North Korean advantage would last about four days.

In his January State of the Union speech, Donald Trump based his case against North Korea on the way Kim’s “depraved” dictatorship mistreats its dissenters. Depraved it is, and mistreat them it does. But the claim that our armed encirclement of North Korea is in the cause of human rights is transparent nonsense. Among our own allies are the oppressors and torturers who run Saudi Arabia, Bahrain, Vietnam, Uzbekistan, Cambodia, and dozens of other dictatorships.

Democracy thrives on peace and prosperity. A war to destroy Kim’s regime would bring mass death, chaos, starvation, and it would turn tens of millions into refugees in their own land. Can anyone argue that North Koreans would be better off?

Finally, there is the claim that we must be willing to destroy North Korea in order to prevent nuclear proliferation. In his memoirs, Bill Clinton wrote, “I was determined to prevent North Korea from developing a nuclear arsenal, even at the risk of war.”

The claim reeks of hypocrisy. The US policy class looked the other way when both Israel and Pakistan built their nuclear capability. Today the Trump administration is discussing a deal that would allow the Saudis to enrich uranium (the essential ingredient for a bomb) in exchange for a nuclear-power-plant contract for Westinghouse. Of course, if stopping proliferation had been the US goal, it would have pursued the on-again, off-again negotiations of the past few decades in good faith, instead of matching North Korea’s paranoia with a failure to live up to our promises.

One clue as to why our troops are still garrisoned in South Korea lies in the panic that spread through the US foreign-policy establishment when South and North Korea recently began their own bilateral talks and agreed to march into the 2018 Olympics under one flag. Instead of seeing this as a positive step toward peace, American leaders—Democrats as well as Republicans—were alarmed that it was driving a “wedge” between the United States and South Korea. By putting pressure on Washington to negotiate, reported the Times, “the breach between South Korea and the United States could become a chasm.”

Thus, from Washington’s perspective, avoiding nuclear war is less a priority than maintaining its influence in that part of the world. Peace between North and South would make the average American safer and less burdened with the cost of deploying all those troops, bombers, missiles, drones, and warships. However, the average American general, military contractor, and globe-hopping pundit would be a smaller—and less well-paid—fish in the East Asian political pond.

Most Americans would not go to war to preserve their privileges.

So far the narrative of fear has stopped an honest political debate that would expose these “vital American interests” for what they are. But that could be changing. As the dogs of war bark louder, the realization that the mentally unstable Donald Trump’s itchy finger is poised above the red button should be making more Americans—across party lines—open to a common-sense challenge to the self-serving dishonesty driving us to the brink.

Certainly, given the growing skepticism of our military overreach, most Americans would support a deal that stops the North’s nuclear program, guarantees it against US-South Korean aggression, and buys time for both the North and South to work out Korea’s fate for themselves.

As his price for not deporting roughly 800,000 “Dreamers” who came to this country as children, Donald Trump demands an escalated war against immigrants, topped by his nightmarish 2,000-mile wall along the Mexican border. Democrats have said no. Whether or not some sort of deal is eventually struck, the country will remain deeply divided over undocumented immigrants from the south.

Unfortunately, though, that debate is entirely focused on domestic policy—how to treat the undocumented after they have arrived. Democrats, thinking Latinos will vote for them, want the newcomers to stay. Republicans, fearing Democrats are right, want them sent back. Employers want their cheap labor. Workers fear their wage competition. The clash of these agendas further inflames simmering social tensions over racism, police tactics, and cultural identity, which in turn feed Trump’s reactionary base.

Lost in these US-centric arguments is the role of our foreign policy in creating the conditions that push people in Central America and Mexico to make the long, arduous, and frequently fatal trek north.

For at least 150 years, the United States has intervened with arms, political pressure, and foreign aid in order to protect the business and military elites of these countries who have prospered by impoverishing their people.

Still, illegal immigration from the region remained modest until the 1980s, when the US government and its neoliberal collaborators at the IMF and World Bank began imposing policies on the region that favored large multinational corporations, undercutting the small farms and businesses that had supported the working poor.

Meanwhile, many of the oligarchs became partners in the growing narco-trafficking business. Protected by government officials, criminal gangs have spread throughout the region, adding threats of kidnapping, extortion, rape, and murder to the daily life of people struggling to make a living. A young Guatemalan recently told me: “Unless you are connected to one of the families that run this country, there is no future here. Either you work for the narcos or go north.”

The US response has been a War on Drugs that provides these same oligarchs with political protection and more weapons. In 2009, for example, the Obama administration ensured the success of a coup by the Honduran military against an elected president whose modest social programs of food and education for the poor had enraged the ruling class.

Since then, US aid to the Honduran oligarchs has more than doubled. Yet two-thirds of Hondurans live in poverty. Large numbers inhabit shacks without toilets, and can’t afford to buy shoes for their children. And the murder rate among Latin American countries is second only to that of El Salvador, which has received even more US aid. Five years after the Honduran coup, the number of children illegally crossing into the United States increased by 1,272 percent.

The ruling class in Mexico, despite that country’s greater size and nationalist culture, has a similar relationship with us—to similar effect. The 1994 North American Free Trade Agreement, sold to Congress as a way to keep Mexicans home, threw millions of peasants and small businesses out of work. Illegal immigration from Mexico doubled.

Over the past 10 years, the United States has given Mexico $2 billion in technology and training, ostensibly to fight drug cartels. Yet, as an international coalition of human-rights groups reported in August, the documented cases of government-connected assassination, torture, and disappearances of activists, journalists, and ordinary people keep piling up.

True, higher fences and more dogs and drones have reduced the rate of illegal crossings. As has a reign of terror against the undocumented—midnight raids, mass deportations, and the ripping apart of families. But that has not stopped the drugs, and it will not stop people from fleeing for their lives. A recent poll reports that one-third of Mexicans (43 million people) would come to the United States if they could. Even if Trump builds his wall, they will find a way over, around, or under it.

We have trapped Latin American migrants between a foreign policy that drives them from home and a domestic policy that drives them back. A humane deal concerning the fate of the Dreamers, although unlikely, would be welcome. But the fundamental conflicts that poison our politics over this issue will remain. If we are ever finally going to resolve how we deal with them here we need to change what we are doing to them there.

“Where are you from?” the elderly man asked politely, as my wife and I strolled through his small Iranian village in early May.

“America,” I answered.

“Wonderful,” he said, grabbing my shoulders and giving me the traditional three kisses on my cheeks. “I am so glad you are here.”

Then he asked, “But why does your government hate us so much?”

I am not shy about criticizing US government policies—when I’m home in America. But, when I’m abroad, I tend to get defensive about my country. So, I muttered something about the importance of people of different nations getting to know each other independent of their politicians, and turned our conversation to the history of his ancient town.

But his question—asked of us by many other ordinary Iranians happy to meet American visitors—deserves a better response. Not so much to explain our foreign policy to Iranians, but to ourselves.

Demonization of Iran runs wide and deep in our mainstream politics. Hillary Clinton and Donald Trump tell us that Iran is the world’s chief sponsor of terrorism, aimed at taking over the whole Middle East, if not the world (this echoes the State Department, which in its recently released annual report calls Iran the world’s greatest state sponsor of terrorism). Both have declared themselves ready and eager to “strike” and “obliterate” Iran. Republican Senator Ted Cruz says flatly that Iran intends to launch a nuclear attack against the United States. Mike Huckabee and Benjamin Netanyahu, who must be considered an American as well as an Israeli politician, say that Iran is preparing the ovens for another holocaust of the Jews. In 2013, when there was no evidence that Iran was building a nuclear bomb, Vice President Joe Biden announced that—just in case—“all options, including military force, are on the table.”

Following their leaders, most Americans have strongly negative opinions of Iran. Polls report that they see the country as only slightly less dangerous than nuclear-armed North Korea. Despite the public’s support for non-proliferation, a majority opposed Barack Obama’s nuclear agreement with Iran. To protect that agreement, Obama is piling on to the already massive US military assistance to Saudi Arabia and Israel, with the curious rationale that Iran, now that it has forsworn nuclear weapons, is somehow more of a menace to them than it was before.

The animosity, of course, is mutual. Since 1979, Iran has been ruled by Islamic theocrats who use the Quran to justify the suppression of domestic political freedom and the denial of civil and human rights. With materialist goals subordinate to religious values, and hobbled by US-led global sanctions, the economy consistently sputters. The sanctions allow the ruling mullahs to divert discontent by blaming outsiders for the nation’s troubles—in particular, the “Great Satan,” America, and its ally Israel.

To American ears this language sounds shrill and paranoid. It recalls images of the angry mobs that in 1979 stormed into the US embassy in Tehran and held 52 Americans hostage for 444 days. But to Iranians it is rooted in historical experience. After all, the United States engineered the 1953 coup against their democratically elected secular government and imposed a ruthless monarchy on the country for 25 years. The organization of the Shah’s murderous and torture-addicted secret police was a joint venture of the US Central Intelligence Agency and Israel’s Mossad.

When the Iranians finally revolted and deposed the Shah, the US backed the 1980 attack on Iran by Iraq under Saddam Hussein. The eight-year war cost Iran an estimated million casualties, including at least 300,000 soldiers killed and tens of thousands still suffering the effects of the chemical weapons used by the Iraqi army, with the collaboration of the United States. Today, enter almost any urban neighborhood or rural village in Iran and you will see prominently displayed photos of the local men—and a few women—who were killed in that war.

During that war, a US missile cruiser entered Iranian waters and shot down an Iranian civilian airliner, killing some 290 passengers. We never apologized, and the trigger-happy US naval commander was later decorated for “exceptionally meritorious conduct.” US warships continue to violate Iranian sovereignty in the Persian Gulf.

The accumulated distrust of American intentions extends to the US-engineered economic boycott over Iran’s nuclear program. Our expressions of angst over nuclear proliferation seem less than honest, given that America tolerated the development of nuclear weapons in both Israel and Pakistan—both of whom have refused, unlike Iran, to sign the non-proliferation treaty. Today, many Iranians doubt the United States will actually deliver on the commitments it has made to loosen financial restrictions on investment and trade.

Still, despite the inflammatory rhetoric of its leaders, Iran is by no stretch of the imagination a serious threat to the United States, Europe, its Arab neighbors, or Israel. At best, it is a third-rate military power with a dysfunctional economy who’s entire GDP is only a little over 60 percent of the US military budget. The supposedly terrified Israel has somewhere between 80 and 200 missiles with nuclear warheads that could send Iran back to the Stone Age in minutes. There is no evidence to suggest that even the most fanatical elements in the Iranian government are suicidal.

Pakistan, on Iran’s border, is similarly armed. The two other major powers in the region, Turkey and Egypt, are militarily superior to Iran. Even Saudi Arabia, with one-third of Iran’s population, has a bigger and better air force.

Beyond its military weakness, Iran’s “soft power” appeal in the region is also limited. Neither its people nor their language is Arabic. And in a part of the world where religious sectarianism is taken very seriously, Iran’s brand of Islam is Shia, which represents less than 15 percent of the Muslims in the Middle East and North Africa.

Like all sovereign states, Iran tries to influence events in its neighborhood. Given the lingering trauma of the war with Iraq, the Saudi/Sunni rivalry and the hostility of the US superpower, Tehran’s primary objective is stability on its western border. This means friendly governments in Iraq, which has a Shia majority, and in Syria, where despite a Sunni majority, the ruling class is Alawite, an offshoot of Shiism.

Like all Islamic states, Iran supports the Palestinian cause against Israel. Here again, a sub-context is rivalry with Saudi Arabia. Iran was a major supporter of Hamas until recently, when the wealthier Saudis elbowed them out. It also remains the primary outside backer of Lebanon’s Hezbollah, although in recent years Iran’s economic troubles led to cutbacks in its financial support. In any event, there has been no significant fighting between Hezbollah and Israel in ten years, save for a few skirmishes when one or another’s soldiers get too close to the border.

Coming from the US foreign-policy hawks whose Middle East interventions lit the fuse of civil war, religious fanaticism, and barbarism, the charge that Iran is the source of regional instability is absurd.

It becomes more so when you consider that Iran is arguably the Middle Eastern country that is most unequivocally opposed to ISIS, Al Qaeda, the Taliban, and other militant Sunnis. Indeed, Iranian support for the Iraqi army and the affiliated Shia militias is now crucial to US success against ISIS, including the plan to recapture Mosul. As Vali Nasr, former adviser to Barack Obama and now dean of the School of Advanced International Studies at Johns Hopkins University, told The New York Times, “The only way in which the Obama administration can credibly stick with its strategy is by implicitly assuming that the Iranians will carry most of the weight and win the battles on the ground.”

Moreover, while our supposed allies, the Saudis, were busy covering up their links to the perpetrators of the 9/11 attacks, the Iranians granted the United States permission to fly to Afghanistan over their territory, agreed to help rescue downed American pilots, and provided assistance to the Northern Alliance—America’s military ally in the US invasion. All of which American officials have acknowledged.

In return, George W. Bush, in his 2002 State of the Union speech, attacked Iran as part of an international “Axis of Evil,” helping to undermine those within Iran calling for a softening of relations. As Michael Axworthy, a former head of the Iran desk at the British Foreign Office, notes, “It reinforced the hardliners’ position on the US and the West—that they could not be trusted.”

This fear of the West is enormously useful to the Islamic reactionaries in their ongoing struggle to keep control of Iran’s future. The conservative Supreme Leader, Ayatollah Ali Khamenei, rules for life and commands the loyalty of the armed forces. But there is a sizable and growing popular movement in Iran for more liberal foreign—as well as domestic—policies, including more contact with the United States. Despite the obstacles to democracy, in 2013 the people elected a progressive reformer, Hassan Rouhani, as president, who, after a two-year struggle, led Khamenei to accept the nuclear agreement.

Evidence of growing Westernization is widespread in Iran—in the shops and shopping malls, the billboards advertising appliances and cars, the cellphones and selfies, and especially in the visible pushback by women against the strict Islamic dress code. Social life is nowhere near as repressive as in the US-supported theocracies of Saudi Arabia, Bahrain, United Arab Emirates, Oman, or Turkmenistan. Women in Iran drive cars, manage businesses, and are elected to public office.

Between 20,000 and 30,000 Jews live in Iran—the largest Jewish population in the Middle East outside of Israel. There are some 60 synagogues, a Jewish Member of Parliament, and a memorial in Tehran to Jewish soldiers who served in the war with Iraq. Jews, like Christians and Zoroastrians, are allowed to practice their religion, but not to proselytize. It’s no liberal democracy, but hardly Nazi Germany—or Saudi Arabia.

So, as the Iranian villager asked, why does our government hate them so much?

The only answer that makes sense is that it reflects the subordination of US policy in the Middle East to the interests of 1) the despotic dynasties that rule Saudi Arabia and the gulf sheikdoms; 2) the Israeli government, especially under Prime Minister Benjamin Netanyahu; and 3) the American politicians, pundits, lobbyists, and national-security bureaucrats whose careers and bank accounts are enhanced by both. It is in the interests of all three to divert attention from the catastrophic consequences of our intervention in the region.

How else can you explain the Bush and Obama administrations’ reluctance to confront the ruling classes of the gulf sheikdoms for their nurturing of ISIS and other terrorists groups inspired by the Saudis’ own Wahhabi fundamentalism? Only when ISIS threatened the Saudis themselves did their support for the Islamic State cease, although it continues to flow to the principal Al Qaeda affiliate in Syria. And how else can we explain the US supply of weapons (including cluster bombs) and aerial intelligence to the Gulf States’ intervention against the Houthi Shias in Yemen, while letting them go AWOL in the war against the Sunni ISIS?

For Netanyahu, Iran provides the monster needed to rationalize and divert attention from his own disastrous and brutal policies in the West Bank and Gaza. During the 1980s, the monster was Iraq under Saddam Hussein. After Saddam’s regime was destroyed and Iraq was occupied by the United States, an alleged genocidal and irrational Iran became the principal horror narrative of the Israeli right wing, a line promptly echoed by the US policy class.

To Barack Obama’s credit, he was willing to push through the snake pit of divided Washington loyalties to achieve the nuclear deal—far more important to our national security than isolating Iran. To complete the deal he must also make sure that the United States lives up to its promise that it will not punish international bankers who provide capital for urgently needed economic development projects in Iran.

A growing economy should in turn reinforce the still fragile shoots of liberal democracy sprouting in that ancient land. It will of course take time to erode the mutual mistrust between the governing classes of the two countries. But for ordinary Americans, understanding that Iran is not our existential enemy should help us to answer the larger question of exactly what we are doing in the Middle East.

]]>https://www.thenation.com/article/archive/why-is-iran-our-enemy/Is It Time for the US to Pull Out of Iraq and Syria?https://www.thenation.com/article/archive/is-it-time-for-the-u-s-to-pull-out-of-iraq-and-syria/Jeff Faux,Jeff Faux,Jeff Faux,Jeff Faux,Jeff Faux,Jeff Faux,Muhammad Idrees Ahmad,Phyllis Bennis,Sherle R. SchwenningerJan 14, 2016

On this day in 2011, President Zine el-Abidine Ben Ali fled Tunisia, following massive protests in the streets. It was the first victory of the Arab Spring. The lessons, Laila Lalami wrote in The Nation at the time, were several: “To the Arab dictators: you are not invincible. To the West: you are not needed. And to the Arab people: you are not powerless.”

Five years later, those parties—as well as newer arrivals on the scene, like Russia, Turkey, and the Islamic State—remain locked in a gruesome struggle for the future of the region. In war-torn Syria, half of the country’s pre-war population of 11 million have either been killed or forced to leave their homes; the government has targeted its own citizens with barrel bombs and chemical weapons; an apocalyptic death cult has conquered territory the size of Britain; and the architectural remains of some of the world’s earliest civilizations have been looted and destroyed.

Contrary to President Barack Obama’s claim in his State of the Union address that the crisis in the Middle East is “rooted in conflicts that date back millennia,” the US invasion of Iraq in 2003 lit a match to the region’s sectarian divisions, and the fire is burning out of control—as this magazine repeatedly warned would happen. Yet even those on the left who accept this basic reading of recent history disagree about what should now be done. Some believe that the United States still has a responsibility to fix what it broke in the region; others that continued US presence in Iraq and Syria will only lead to more death and destruction.

To launch “That’s Debatable,” The Nation’s new series of online forums about questions that remain unsettled on the left, we asked four experts to answer this question: “Is it time for the United States to pull out of Iraq and Syria?”–Richard Kreitner

Why is this our fight?

The war is already lost. None of the US governing class’ shifting war aims—stabilizing the region, defending human rights, ending terrorism, establishing democracy—can be achieved. There is no future “diplomatic” solution that justifies continuing the waste of life, treasure, and national honor.

Our ongoing intervention in the Middle East cannot succeed for the same reason that it could not succeed in Vietnam: We are foreign invaders, brutal enough to alienate the people of Iraq and Syria but not brutal enough to subjugate them. By expanding and re-escalating the war with enough US troops and bombs—and bribes to every warlord in sight—we might (with or without the Russians) degrade and perhaps even destroy, the Islamic State organization in Iraq and Syria. But it would leave the region an even more ungovernable wasteland of death and destruction and hatred of Americans.

ISIS is but one of many groups using that hatred as a ladder to power. In order to hammer down others who would inevitably pop back up in this grisly game of whack-a-mole, the United States would have to indefinitely maintain a heavily armed presence in the region. The cost would be enormous, and American voters—who have not even been willing to pay higher taxes to support the current level of occupation—will have no stomach for it.

We cannot predict the consequences of a complete US withdrawal. But we do know that without the American presence, extremists would no longer be able to position themselves as the Islamic defenders against Western crusaders. Moreover, if ISIS really is the existential threat to the region that the bipartisan Washington war chorus says it is, then, if left to themselves, the Sunnis and Shiites, Turks and Kurds, Iranians and Saudis would be compelled for their own survival to join together to take it down. Their combined armed forces are at least 15 times larger, and are far better equipped, than the army of ISIS, which does not even have an air force. If the prospect of an ISIS caliphate is not enough of a threat for them to unite, why is this our fight?

Leaving would be logistically complicated and probably, at times, undignified. It would cost money up-front; we have obligations to people we would have to compensate and probably resettle. But the longer we fight, the more expensive it will be.

Meanwhile, the costs at home are piling up. We are diverting vast resources from an economy that is becoming less equal, less fair, and less competitive. We are exhausting our moral capital. Fear-mongering fans the flames of bigotry and frightens the public into ceding civil liberties in the name of national security. Endless war means the endless erosion of our democracy.

Despite the grisly sensationalism of the pro-war media, most Americans think the invasion was a mistake and oppose the redeployment of troops. At least a third of the electorate has consistently opposed any US military involvement at all. This should certainly be enough of a base upon which to build an anti-war constituency.

But with or without an anti-war movement, we will eventually pull out. The question is how many more people have to die before we do.

Toward a more responsible alternative

By now it is clear that US policy in Iraq and Syria is a disaster. In neither country has the situation been improved by the US military presence. In Iraq it empowers the same sectarian militias that forced alienated Sunnis into the arms of ISIS. In Syria it ignores, even accommodates, the regime whose brutality spawned the jihadi menace in the first place. In both countries its actions address symptoms rather than causes and alienate people without providing any commensurate security gains.

But would the situation improve if the United States were to withdraw? Ask the Yazidis of Iraq, whose tragedy would have been much larger had it not been for the timely US intervention; ask the Kurds of Syria, who would have been routed in Kobani had it not been for the sustained airstrikes that helped them repel an ISIS offensive. The Sunnis of Iraq might well ask who would protect them from the revanchist fury of the newly empowered sectarian militias, absent a US presence.

The issue then is not so much the fact of US military involvement as the nature of this involvement.

The United States bears responsibility for much of the current turmoil in the Levant. Had it not been for George W. Bush’s war and the fracturing of the Iraqi society, the region wouldn’t have turned into an incubator for jihadism. Had it not been for Barack Obama’s betrayal of the Syrian revolution—by making lofty promises and offering meager support; by following brave words with conspicuous inaction; and by demanding that Syrians submit their political aspirations to US security concerns—a quarter-million people would not have lost their lives, millions would not have been displaced, and thousands would not have drowned. The region suffers today from neoconservative sins of commission and realist sins of omission.

The United States could exit the Middle East and, in Sarah Palin’s immortal words, “let Allah sort it out.” But it would have condemned the region to perpetual war. Isolationism in the face of serious geopolitical challenges is not only an abdication of responsibility but also a recipe for disaster. A US withdrawal from the region would not herald peace and harmony; it would encourage regional powers—and their myriad proxies—to step into the vacuum and fight for territorial or strategic gain. Such wars would inevitably draw the United States back into the region and in an even weaker strategic position—to resolve a problem that has become more intractable, and as a hostage to someone else’s interests.

A more responsible alternative is for the United States to reorient its engagement with the region from states to people. It can build upon its limited successes—with the Kurds and the Yazidis, for example—to show greater solicitude for the interests and aspirations of the people. It can stop viewing the region exclusively through a security lens (a mode of understanding that has led it to embrace dungeons and dictators, alienating people and multiplying threats). The United States can change its role—and consequently the way it is perceived in the region—by respecting people’s rights to self-determination and by being more mindful of the underlying social and political institutions (not regimes) that ensure stability.

In Iraq, if the United States aims to evict ISIS without exacerbating sectarian tensions, it must end its exclusive reliance on Shiite forces and revive alliances with the Sunni tribes. In Syria it must end its ambivalent attitude toward the murderous Assad regime and provide meaningful support to the opposition.

A precipitate exit from the region will do nothing to bring peace, nor will it endear the United States to the people of Iraq and Syria, or beyond. But championing the region’s vulnerable populations might change its reputation from that of overbearing hegemon to that of indispensable ally.

You can’t bomb terrorism

While US troops and planes and bombs and drones should be pulled out of Iraq and Syria immediately, we can’t just walk away. We have to talk about what we owe the people of Iraq and Syria who continue to face the consequences of years or decades of horrific wars. We have an obligation to help support reconstruction, humanitarian relief, diplomacy, compensation, and much more.

But first, the United States needs to stop the airstrikes. They kill civilians and undermine the goal of ending popular support for ISIS. Bombing destroys cities, so ousting ISIS becomes a pyrrhic victory. And when ISIS loses territory, it reverts to old-fashioned terror attacks. Troops and weapons don’t work to stop terrorism; they aren’t keeping the Syrian or Iraqi people safe (let alone keeping Americans safe); and they prevent the implementation of many of the non-military strategies that even US officials agree are needed to counter ISIS. You can’t bomb terrorism—you can only bomb people. Sometimes the dead might include terrorists, but killing them just sparks more terrorism, not less.

We need powerful diplomatic action to replace powerful but failed military action—and that includes serious engagement with Iran, among other regional players.

We need to start talking about an arms embargo on all sides. As long as the region continues to be flooded by mostly US-made weapons, the United States has no credibility telling Iran and Russia to stop arming the Syrian regime. With escalating tensions threatening all-out war between Saudi Arabia and Iran, any US effort to “avoid taking sides” requires Washington to halt its current support for Saudi military action (including in Yemen). Instead, the United States needs to exert serious pressure on its longtime ally to end Riyadh’s deliberate provocations, including by cancelling the multibillion-dollar arms purchases at the core of US-Saudi relations.

“Pulling out” is what we do with troops, planes, bombs and drones. But crafting a serious strategy does not end with pulling them out; we also need to take the money now being spent on a failing war and redirect it to serve domestic needs and to assist the countries and peoples we’ve been bombing for so long. That means welcoming refugees to the United States, and massive increases in our contributions to UN agencies struggling to care for the millions of refugees and internally displaced persons, as well as for reconstruction of devastated towns, cities, and countries.

The internationalist solution

It is not time for the United States to get out of Iraq and Syria, for that would undermine the military and diplomatic progress that has been made in recent weeks. But it is time for the United States to move away from policies that have destabilized the region and put us on the front lines of a war with radical Salafists. Over the past few months, the Obama administration has finally sobered up from its Arab Spring triumphalism and has begun to back away from its policy of regime change in Syria. This, together with the Russian intervention in support of the Syrian government and army, has begun to turn the tide against the advance of the Islamic State and other foreign-supported Salafist groups. For the first time since 2012, an end to the Syrian war is dimly visible.

But it will require a more substantive change in American strategy and, to some degree, a realignment of US relations in the Middle East. Our support of the Kurds and the Iraqi army will remain important. But the United States also needs to work more closely with Russia and its coalition of Syria, Lebanon, Iraq and Iran, as well as with France and our European allies, to form a broader internationalist coalition committed to defeating ISIS and other radical Salafist groups and to establishing a more widely functioning government and economy in Syria. In the process, it will need to challenge, like it never has before, its Sunni allies—Qatar, Saudi Arabia, and Turkey—to end their double game of supporting Salafist groups and fanning sectarian tensions while pleading for special attention as American allies.

This shift in strategy toward an internationalist coalition would have three dimensions: military, political, and diplomatic. The first would entail coordinated military action between the Russian-supported Syrian army advance and the American-European Kurdish offensive in the north and east. The goal would be to seal the Turkish border so as to stop the flow of arms and foreign fighters into Syria and Iraq. The political dimension would be the isolation of the three main radical Salafist groups—ISIS, al-Nusra Front, and Ahrar al-Sham. It would also involve the expansion of the cease-fires between the Syrian government and local militias to create an end to the internal Syrian civil war and establish the framework for a lasting political settlement. The diplomatic dimension, started at Vienna, would be an international agreement to end international support of ISIS and to support an internal political settlement with a blueprint for elections and political reform.

It is critically important to US interests and to international order to change US strategy, because stabilizing the Syrian-Iraqi-Lebanon-Jordan core of the Middle East is essential for international stability and for any hope of progress in the Arab world. It will not end the threat of Wahhabi-inspired terrorism in northern Africa, Europe, and other places, but it will help prevent the further disintegration of the international order in Europe and the Middle East and allow the region to turn to a new narrative of economic reconstruction and social progress rather than a narrative of religious war. If the United States can’t adapt its strategy in this way, and it may not be able to do so given the alignment of political forces, then it may be better to withdraw entirely.

Thomas Piketty just tossed an intellectual hand grenade into the debate over the world’s struggling economy. Before the English translation of the French economist’s new book, Capital in the Twenty-first Century, hit bookstores, it was applauded, attacked and declared a must-read by pundits, left, right and center. For good reason: it challenges the fundamental assumption of American and European politics that economic growth will continue to deflect popular anger over the unequal distribution of income and wealth.

“Abundance”, observed the late sociologist Daniel Bell was “the American surrogate for socialism.” As the economic pie expands, everyone’s slice grew bigger.

The three-decade long boom that followed World War II seemed to prove Bell’s point, tossing Karl Marx’s forecast of capitalism’s collapse into the dustbin of history.

Marx predicted that as markets expand, profits from technological innovation would gradually dry up, depressions would get more severe and capitalists would drive labor’s share of income in the advanced industrial economies so low that revolution was inevitable.

But twentieth-century capitalism proved more resilient than Marx thought. New technologies continued to generate more profits and jobs. Keynesian fiscal and monetary policies prevented cyclical business downturns from triggering depressions. And the investor class, threatened by the specter of communism, agreed, grudgingly, to the New Deal model of strong unions, social insurance and other policies that forced them to share the profits from rising productivity with their workers.

In the United States, the portion of income going to the richest dropped from over 45 percent in the 1920s to under 35 percent by the 1970s. Between 1959 and 1973 the percentage of Americans living in poverty was cut in half. Other industrial countries followed the same pattern.

Ultimately, it was the communist system that collapsed, unable to match capitalism’s performance in providing the proletariat with a house, a car and the other totems of a middle-class life.

The idea that capitalism naturally led to greater equality was codified in a 1955 landmark study by the American economist Simon Kuznets, whose data showed that after an initial period of rising inequality (e.g., our nineteenth-century gilded age) the wealth generated by market economies is distributed between labor and capital more evenly. When workers’ productivity rose, so do their wages. The “Kuznets Curve” quickly became conventional wisdom for both mainstream economists and the politicians they advised. As the nautical John F. Kennedy put it: “A rising tide lifts all boats.”

The central question for Western economists then became how to keep the tide of growth rising. Liberals favored more active government interventions, conservatives more incentives for private investors. Income and wealth distribution—the issue that had preoccupied economists since Adam Smith—was narrowed to studies of the characteristics of the poor (their race, their gender, their sex life, etc.) that prevented them from rising with the tide. Almost no one studied the rich.

Then, in the late 1970s, the trend toward equality reversed. Workers’ output-per-hour continued to rise, but their wages and benefits flattened. Almost all of the gains from the increased productivity of the last three and a half decades went to corporate investors and their top managers. The poverty rate rose by a third. And the pain spread steadily up the socioeconomic ladder.

Mainstream economists have been disgracefully slow in responding to this historic shift in who gets what. When Larry Mishel and his colleagues at the Economic Policy Institute began reporting on the growing gap between workers’ productivity and their pay in the mid-1980s, the first reaction of the economist establishment was denial. When they could no longer ignore the data, economists blamed the workers themselves for not being educated enough for the new information age.

Mainstream politicians were soon lecturing downscaled Americans that they should go to—or back to—college. So they did, in record numbers. Increased education is critical for growing the economic pie, but the evidence—including a dozen years of falling real wages among new college graduates—shows that lack of schooling is not the reason why the slices of the super-rich rich are growing so much faster that everyone else’s.

No matter that the facts don’t fit. It is easier for economists and politician to tell a story about dumb workers and smart bosses than to address the more obvious causes of the upward redistribution of wealth. Talk of offshoring jobs, suppression of unions, shredding of social safety nets and tax breaks for the rich makes the corporate contributors to academic careers and political campaigns too nervous.

To be sure, Democrats have ramped up the rhetoric. Bill Clinton ran for president in 1992 complaining that Americans were “working harder for less.” Over two decades later, they still are. Five years into his presidency, Barack Obama now tells us that inequality is the “defining issue of our time.” But even if Congress passed his modest agenda of an increase in the minimum wages, tax credits for the poor and a marginal boost in funds for education and training, it would just slow down the ongoing upward redistribution of wealth. Other Obama proposals, such as more free trade and continued fiscal austerity, will accelerate it.

Underneath the rhetoric, the actual message from our governing class is: have patience. The economic tide—bringing with it good jobs at good wages—will soon rise again. It always has.

But as the US economy crawls into the sixth year of recession and the fourth decade of stagnant real wages, the signals ahead tell us that this time it probably won’t.

The Obama administration’s “optimistic” ten-year forecast (for obvious reasons, administration forecasts always lean toward optimism) is for enough growth to drop the unemployment rate to 5.4 percent by 2018 and have it remain there until 2024. Given that joblessness averaged 4.6 percent in the three years before the 2008 crash while wages stagnated, the president’s own economists are implicitly predicting that the gap between workers’ production and workers paychecks will widen further.

Others are even less sanguine. Progressive economists like Paul Krugman and Joe Stiglitz—and now even the less-than-progressive Larry Summers—think that the US and European economies are trapped by chronic weak consumer demand. Their remedy is more government spending on education and infrastructure to put more money in customers’ pockets. But the reactionary fiscal austerity that dominates Washington and Brussels—even among the left-center parties—makes such aggressive Keynesianism a political non-starter for the foreseeable future.

Over the longer term, the prospects can be downright grim. The venerable Robert Gordon, an economist known for careful analysis, thinks that the innovation that has driven growth for over a century might well slow from its average of 2 percent per year since 1891 to 0.2 percent for the foreseeable future. Add tightening environmental costs and constraints and the good ship Abundance sinks to the sea floor.

The pessimists of course could be wrong. It’s certainly possible, if not plausible, that some unpredicted burst of entrepreneurial energy or a simultaneous reconversion to Keynesianism could propel growth faster than even Obama’s optimistic economists forecast. Couldn’t that be enough to float us back to Kuznets’s curve of rising equality?

Using data and computer power unavailable to Kuznets, Piketty pored through 200–300 years of the economic history of the largest capitalist economies—principally the United States, Britain, France, Canada, Germany, Sweden and Japan. The numbers show that that since roughly 1700, with one exceptional period, the returns to capital (profits and interest) have exceeded the rate of overall economic growth. Since the rich own most of the re-investable capital, their wealth accumulates faster than the wealth of the vast majority of people whose income depends on wages and salaries.

The exceptions to the historical trend were the years 1914–75 in Europe and 1929–75 in the United States, in which inequality shrunk in almost all western nations. According to Piketty this era was unique: the consequences of two world wars, the Great Depression and the social democratic character of the postwar recovery in Europe, Japan and North America. Once those forces were spent, capitalism returned to its normal function as a machine for producing “inequalities that radically undermine the meritocratic values on which democratic societies are based.”

Moreover—and this is a key point—contrary to what we’re taught in Economics 101, markets appear to have no self-correcting mechanism that can halt the worsening misdistribution of wealth. If allowed to go unchecked, a tiny number of capitalists will own just about everything, with social consequences that Piketty sees as “potentially terrifying.”

We have already returned to the levels of income inequality of the 1920s, and the concentration of wealth is heading toward the ratios of the 1890s. The social relations of the future, writes Piketty could resemble Jane Austen’s world, in which a tiny group of the wealthy employed vast armies of poorly paid servants.

The super-rich of the twenty-first century are somewhat different than they were in Marx’s time, especially in the United States. Most still are the heirs of fortunes made in the distant past. But those in the top tier of today’s “patrimonial capitalism” also include more recently arrived corporate CEOs and others who can set their own exorbitant salaries and leave their children both financial wealth and privileged access to education and elite networks. To the economist Piketty, the waste of resources going to the systematic enrichment of people who do not have to work for a living is particularly galling.

Piketty is certainly not the first economist to criticize inherited wealth. And the idea that capitalism is unfair will not shock most people who work for a living. But Piketty’s credentials and exhaustive attention to statistical detail make him harder for the pundits and policy elites that protect the plutocracy to dismiss.

In addition to exposing the weakness in a core principle of the economist canon, Piketty’s data-driven methodology skewers the class bias masquerading as science that pervades the study of economics and the formulation of economic policy.

Economics claims superiority over other social sciences on the basis of its greater capacity to quantify reality, i.e., crunch numbers. Yet for decades now the numbers have been in conflict with hallowed tenets of the capitalist catechism. For example, the forty-year gap between wages and productivity refutes the theory that workers get paid according to their efficiency. Twenty-five years of relentless job losses and wage decline because of globalization mocks the rigid faith in free trade. We haven’t had a peacetime price spiral driven by US government deficits in modern times, yet the conventional wisdom has us cutting food stamps to placate inflation paranoia.

Similarly, the orthodox creed holds that Piketty’s central point cannot possibly be true. The rate of return to capital cannot be higher than the rate of economic growth for long because when the supply of capital increases, its price—the rate of return—has to fall. Piketty’s response: look at the facts, which show that in the real world this adjustment can take so long (a century or more) and cause so much damage that the theory is irrelevant.

Piketty is not a Marxist. He sees no real alternative to global capitalism and has little interest in changing its inner workings through worker ownership, nationalization or the redevelopment or local or national markets. Like Keynes, his goal is to make markets a more efficient instruments for human progress. But although he supports the standard progressive agenda of financial regulation, public investment in education and infrastructure and aid to the poor, he thinks that in a globalized economy, capital is now beyond the control of any one country—even the United States. Efforts by individual nations to constrain capital will just chase away highly mobile private investment.

The ultimate solution, he writes, is a worldwide progressive tax on private capital. Piketty understands that this is now utopian. But he argues that the tax is technically feasible and could be gradually adopted region-by-region.

Here Piketty seems out of his political depth. In order to avoid Marx’s apocalyptic conclusion, he skips around a central implication of his own analysis: that the upward redistribution of wealth also generates an upward distribution of political power that perpetuates inequality. An enforceable global tax on capital ownership would require dramatic political shifts to the left within the major economies—at least the United States, Europe, China, Japan—and unprecedented cooperation among these economic rivals to face down transnational capital and force the rest of the world to accept it. Eyes will roll.

Still, Piketty’s proposal sets a realistic marker for the level and scope of radical change necessary to deal with the grim conclusion of his quite credible economic analysis. The analysis makes hash of the conservative claim that there are “market solutions” to inequality, as well as the liberal hope that small-bore reforms will eventually achieve social justice on the cheap.

It also challenges the lack of urgency that infects social democratic parties in the capitalist world whose answer to inequality has been to wait for the crisis to pass and tide to come back and float all our boats.

But if Piketty is right, time is not on their side. His study confirms what David Ricardo, Karl Marx and other nineteenth-century economists perceived earlier about the machinery of capitalism: it is not only unfair, it is relentlessly and dynamically unfair. Until we make radical changes either the way it works or who it benefits, the maldistribution of wealth and political power can only get worse.

This past winter both the outgoing director of the CIA and a separate Pentagon report declared political instability in Mexico to be on a par with Pakistan and Iran as top-ranking threats to US national security. It was an exaggeration; Mexico is not yet a “failed state.” On the other hand, it is certainly drifting in that direction.

A vicious war among narco-trafficking cartels last year killed at least 6,000 people, including public officials, police and journalists. The country leads the world in kidnappings (Pakistan is second). And with the global crisis, the chronically anemic economy is hemorrhaging jobs, businesses and hope.

Not surprisingly, voters turned against President Felipe Calderón’s right-wing National Action Party (PAN) in the July 5 midterm elections. But the left-wing Democratic Revolutionary Party (PRD)–which many believe was robbed of the presidency in the 2006 election–has ripped itself apart with factional infighting. So frustrated Mexicans gave their Congress back to the Institutional Revolutionary Party (PRI), whose decades of corrupt authoritarian rule were supposed to have permanently ended in 2000. At least, thought many voters, the PRI knows how to keep order.

Mexicans are of course responsible for their own country. But geography has always forced them to play out their history in the shadow of their northern neighbor. “Poor Mexico,” goes the saying. “So far from God, so close to the United States.” Today, Mexico is a prime example of the socially destructive effects of the neoliberal economics promoted throughout the world by the US governing class.

The North American Free Trade Agreement–proposed by Ronald Reagan, negotiated by George Bush I and pushed through Congress by Bill Clinton in 1993–is both symbol and substance of neoliberalism. It was sold to the citizens of the United States, Mexico and Canada with the promise that free trade in goods and money would transform Mexico into a booming middle-class economy, dramatically reducing illegal immigration and creating a vast market for US and, to a lesser extent, Canadian exports.

Fifteen years later, Mexico is still unable to create enough jobs to employ its people. Out-migration has doubled, and on both sides of the US-Mexico border labor-market competition has kept wages down. At the top, income and wealth have ballooned. It is no accident that among NAFTA’s prominent godfathers were former Treasury Secretary Robert Rubin (Democrat) and former Federal Reserve chair Alan Greenspan (Republican), whose fingerprints are all over the current global financial disaster.

I was an opponent of NAFTA. Still, I thought the best case for it was that efficiencies from economic integration could at least make US and Mexican businesses more internationally competitive. But even that argument turned out to be worth no more than a share of Bernie Madoff’s hedge fund.

Several years ago I gave a speech to a group of businesspeople in Mexico City. Those from the multinational banks and corporations thought NAFTA was a great success, but smaller Mexican businessmen saw it differently. You Americans, said one, promised that with your technology and our cheap labor, we’d be partners in competing with Asia. Then you opened up your markets to China and invested there instead. “Sure,” he said. “We can make TV parts for half what it costs in the United States. But the Chinese can make them, and ship them, for a tenth. So instead of closing the gap between Mexico and the United States by raising wages, we have to narrow the gap between Mexico and China by lowering them.”

When I mentioned the conversation to a New York investment banker who had lobbied for NAFTA, he conceded that his side may have talked vaguely about partnership with Mexico. But he shrugged and added, “Things changed”–that is, profit opportunities in China dwarfed anything Mexico had to offer.

The Wall Streeters had little interest in making Mexico more competitive. They also had little interest in making the United States more competitive. Their purpose was just the opposite: to disconnect themselves and their corporate partners from the fate of any particular country. The World Trade Organization, the opening of the US market to China and a parade of bilateral trade agreements followed in NAFTA’s wake.

In Mexico, the political and financial elite were willing collaborators. For example, NAFTA opened up Mexican banks to foreign ownership: political insiders who had bought the giant Banamex from the government for $3.2 billion and gotten the government to provide it with permanent subsidies then sold the firm, with the subsidies, to Citigroup for $12.5 billion. Today roughly 90 percent of the banking system is owned by US and other foreign investors, who do not have to recycle Mexicans’ deposits, or the Mexican government’s money, back into Mexico but can invest them anyplace in the world.

The Banamex deal was negotiated by Rubin after he became Citigroup’s $17 million-a-year executive committee chair. In the late 1980s, when he was at Goldman Sachs, Rubin had midwifed the privatization of Mexico’s phone system to Carlos Slim, a politically connected Mexican businessman. Slim then used the monopoly profits from his high phone rates to invest all over the globe–including a substantial ownership stake in the New York Times. The latest Forbes rating says he’s the world’s third-richest man.

Still, as long as the US economy was blowing dot-com and subprime bubbles, the neoliberal model seemed stable. US investors got Mexican bank deposits and cheaper labor on both sides of the border. Through out-migration to the States, Mexico’s oligarchs got rid of frustrated workers who might otherwise have been politically troublesome. The economy also benefited from hard-currency remittances migrants sent back home.

Another infusion of cash to the Mexican economy, unacknowledged in the official statistics, is the roughly $25 billion in illegal drug exports to the States. Today, with remittances, oil prices and tourism depressed, the narco trade is probably Mexico’s largest single earner of hard currency.

NAFTA and the neoliberal ideology it represents are certainly not the root causes of narco-trafficking. But they have been major factors in its recent monstrous growth. For starters, the trade agreement created a two-way overland superhighway for contraband; the Mexican drug lords use the dollars they have earned from their exports to import guns, aircraft and sophisticated military equipment from the United States to fight their territorial wars. By wiping out small Mexican farms that could not compete with heavily subsidized US agribusiness, NAFTA also expanded the pool of unemployed young people that provides the narco-traffickers with recruits. And banking integration under NAFTA made money laundering much easier.

Perhaps most important, NAFTA has helped maintain the corrupt network of Mexican oligarchs. The 1988 presidential election–which the then-ruling PRI had to steal from the PRD to win–shocked the establishment on both sides of the border. By opening up Mexico to US money and influence, NAFTA was a way, as the US Trade Representative said to me at the time, “to keep the Mexican left out of power.”

Until the 1980s, Mexican drug (mostly marijuana) smuggling to the north was modest in scale and generally tolerated by successive PRI governments. Their message was: we don’t care what you sell to the gringos, but no rough stuff here, keep it away from our kids and of course share a little of the profit under the table. But the US-backed neoliberals who took over the PRI in the 1980s had closer ties with the Mexican cartels. The brother and father of president and NAFTA champion Carlos Salinas–hailed in Washington as a good-government reformer–were widely accused of being connected to the drug business. In Salinas’s first year in office his national police chief was found with $2.4 million in drug money in the trunk of his car.

In the 1990s, as the geographically better-positioned Mexican cartels muscled out the Colombians as chief cocaine retailers to the US market, their profits and political influence grew. But so did the rivalry among them and their allied government factions for control of trade routes. Bullet-riddled bodies began showing up on the streets, making the public nervous.

Seeking legitimacy after his 2006 election was tainted by charges of fraud, President Felipe Calderón declared war on the narco-traffickers. It was a popular gesture, but given that the police, the military and the legal system are heavily infiltrated by the gangs, it backfired. The narcos reacted with horrific violence–assassinations, beheadings and mutilations of police and soldiers as well as thugs, brazenly displayed on YouTube. Losing control, Calderón appealed to George Bush II for help. The result: the Mérida Initiative, a $400 million-per-year program to provide aircraft, military equipment and training to the Mexican police and military.

After decades of keeping its distance from the United States, the Mexican military–like the armed forces of Colombia, Honduras and other Latin American countries–is becoming a Pentagon client. In turn, Mexican society is itself becoming militarized. Corrupt local police are being replaced by soldiers who may be slightly less corrupt but who are a greater threat to human rights and democracy. An April Human Rights Watch report identified seventeen specific cases of abuse by the Mexican military, including “killings, torture, rapes, and arbitrary detentions.”

To his credit, Barack Obama has acknowledged what his predecessors failed to: that the US demand for drugs and its supplying of arms makes it an enabler in the rise of narco warlords. But he has also made it clear that neither issue is on his administration’s agenda. Moreover, just as Bill Clinton carried the water for George Bush I’s NAFTA, Barack Obama has endorsed Bush II’s Mérida Initiative.

Given the unwillingness of US politicians to deal with the demand side of the market, the Mérida Initiative is not likely to be any more successful in eradicating the drug trade than the $6 billion Plan Colombia has been. The best one can hope for is some sort of market-sharing deal among the cartels that would be implicitly endorsed by the Mexican government while Washington tactfully averts its eyes. Given that in many areas, drug money is the chief source of campaign financing, a PRI-dominated Mexican Congress might be just the right forum for a cynical, but welcome, end to the killings.

Meanwhile, the drug violence has frightened away tourists and investors, making Mexico’s recession even worse. Most forecasters expect the economy to contract some 6 percent this year–a huge hit to a country in which 45 percent live on $2 a day or less. Calderón’s response is to tread water–rescuing big businesses that speculated on Wall Street derivatives and dribbling out a bit more public spending–while waiting for the United States to once again suck up Mexico’s surplus labor.

But even when the US economy recovers, it is unlikely to re-create the credit boom that kept the NAFTA deal afloat. In the post-crash era, the United States will finally be forced to address its trade deficits and its massive foreign debt. Americans will have to slow down consumer spending, increase savings and sell more to–and buy less from–the rest of the world. If Mexico could not prosper during fifteen years of exporting goods and people to a bloated US consumer market, it is hard to believe it will be able to do so when that market has slimmed down.

The entire relationship must be rethought. In this regard, Obama’s abandonment of his campaign pledge to renegotiate NAFTA was a missed opportunity. A renewed debate over the trade deal could have spurred public discussion of the failure of neoliberal economics, the “war on drugs” and an immigration policy that ignores conditions in Mexico that drive people across the border. It could have been a forum to think through the question of how continental integration can work for working people rather than just investors. For example, what kind of cooperative transportation, energy and green industrial policies would make the people of three nations–now bound together in one market–globally competitive?

Obama’s Wall Street advisers have no more interest in this sort of change than did Bush’s. And without a new economic direction, life for the average Mexican will surely worsen and social tensions rise. Some Mexican friends point out that the revolution against Spain erupted in 1810 and the one against the US-backed dictator Porfirio Díaz in 1910. And in 2010… ?

In any event, Mexico’s growing troubles will not stay conveniently on the other side of the Rio Grande. Build a ten-foot wall, and desperate people will find twelve-foot ladders. Free trade will, of course, continue to flourish; Homeland Security Secretary Janet Napolitano estimates that Mexican drug cartels are now operating in 230 US cities.

So, thanks to the people who brought you the subprime mortgage disaster, the credit freeze and the Great Recession, the next Mexican revolution may come closer to home than you think.

In the great Italian historical novel The Leopard, the Sicilian prince asks his nephew Tancredi why he is joining Garibaldi’s revolt against their king. Tancredi replies, “Unless we…take a hand now they’ll foist a Republic on us. If we want things to stay as they are, things will have to change.”

Treasury Secretary Tim Geithner, economic adviser Larry Summers and the rest of Barack Obama’s merry band of Wall Street revolutionaries certainly seem to have brought change. Building on the bank bailout of the waning days of the Bush era, they have committed at least $4 trillion in cash, credit and guarantees to rescuing the nation’s bankers and brokers from their own reckless behavior. America’s modest level of crony capitalism has swollen to full-service financial-firm welfare. Inasmuch as US corporations can live forever, this is the cradle of a corporate socialism that potentially has no grave.

Federal Reserve chair Ben Bernanke says he understands that citizens are “concerned” that the people who caused the problem are being rewarded. But suck it up, he advises. “Our economic system is critically dependent on the free flow of credit.”

Just so. But on what, the concerned citizen might ask, does the flow of credit depend? Last fall, one could have reasonably argued that lenders, their capital having evaporated in the crash, had no money. The TED spread, which tracks the difference between Treasury and interbank interest rates and is the most closely watched measure of credit availability, was then at an all-time high (460 basis points)–reflecting the heavy risk premiums banks were charging one another.

By January the spread was back to its pre-crisis level of less than 100, indicating that banks were lending to one another again. Why? Because, given the new government safety net, they trust that they will get their money back with interest. But why aren’t they lending to the rest of the economy? It’s not a cabal against the public; banks make their money by lending. It’s the recession; with rising unemployment and falling sales, making loans to businesses is generally too risky.

So banks have used the bailout to increase their reserves, finance mergers, overpay their executives and hire lobbyists to kill Obama’s bill to allow bankruptcy judges to protect homeowners from foreclosure. Geithner, Summers, Bernanke and the rest of their cohort certainly know this. It follows that the purpose of the multitrillion-dollar bailout is not to spark a recovery through increased lending but to preserve our financial behemoths until the economy recovers. Then, unburdened by their self-created bad debt, the hedge-funders, arbitrageurs and leverage artists will be in good shape to get back into the credit-bubble business.

The real recovery, which will be financed when banks begin to see customers coming into their clients’ stores with money in their pockets, is being left to the comparatively modest stimulus package. Many economists think we will need a new round of government spending perhaps by the end of the year.

The president correctly says that the source of growth has to shift from debt-driven consumption to the production of goods and services that produce jobs and higher living standards. But his team’s priority is to restore things to pretty much as they were. How else do we explain the kid-glove handling of Citigroup, AIG, Merrill Lynch et al., compared with the harsher treatment of the auto industry? Downsizing the auto companies, bankrupting suppliers and slashing autoworkers’ wages is hardly a way to accelerate an economic rebound. If real growth was your primary objective, would you leave the fate of GM and Chrysler to “auto czar” Steve Rattner, a hedge-fund operator whose firm is deep in a pension-fund bribery scandal?

The pervasive influence of Wall Street on this government’s “change” agenda was evident at the recent G-20 economic summit in London. The first priority for the US economy–and, one would think, for Obama’s future–was to get the other developed nations to expand their economies. Unless they do, much of the undersize US spending stimulus will be lost to an increased trade deficit. The Europeans–led by the fiscally conservative Germans–were disinclined. Instead, they argued for the international regulation of finance.

In the interest of most Americans, the response should have been obvious: offer to accept international financial regulation in return for a European agreement on a stronger domestic stimulus. A deal may or may not have been struck. But Wall Street, not wanting to be subject to international regulators who might be beyond the reach of their money and influence, would have none of it. If that weakened the US recovery, so be it. The administration concurred. The meeting ended with a few coins tossed to the International Monetary Fund, and the status quo was preserved.

The public feathering of the corporate nest will certainly continue. After releasing the results of the Treasury’s big bank “stress tests,” in early May, Geithner told ten banks to go out and get more private capital. At first, bank stocks rose. But when the markets realized that the stress tests were more like open-book exams, the stocks fell back. That there might be more toxic assets in the vaults than the rushed and understaffed government audit teams could find dampened investor interest. Since these banks are “too big to fail,” the Treasury will have to further sweeten the pot, either with more cash or by converting the preferred bank shares it already owns into common stock–or both.

Angst about government ownership, of course, babbles through the business media. But the smart money understands that the revolving door of cash and people between Wall Street and Washington will protect the plutocracy. In this regard, the revelation that Summers moonlighted as a hedge-fund consultant while serving as president of Harvard is certainly reassuring. As was the New York Times report that a bill the Treasury sent to Congress expanding the government’s bank takeover powers was drafted by a law firm that works for the finance industry’s lobbying group. And if a Democratic president elected on a message of transformation brings us a treasury secretary who is a protégé of Robert Rubin of Citigroup, Pete Peterson of Blackstone and Henry Kissinger, what’s the worry?

“All will be changed,” the prince repeats to a retainer. “Then all will be the same.”

For more than a decade, we Americans have been living on an economic San Andreas fault–a foundation of fracturing competitiveness covered by unsustainable consumer spending with money borrowed from foreigners. A financial earthquake was inevitable. We don’t know how high on the recession Richter scale the current crisis will take us, but it increasingly looks like, as they say in San Francisco, “The Big One.”

Since the last Big One, the Great Depression of the 1930s, we have had eleven small to medium recessions, lasting an average of ten months. The most severe–two back-to-back downturns that began in 1979–drove price increases and the unemployment rate to double digits.

We’re not at those levels yet. But the structural supports underneath our shop-till-we-drop economy are considerably weaker. For starters, we have a historic depression in the housing market. Americans’ total mortgage debt now exceeds their home equity, for the first time since 1945. Housing prices have dropped 10 percent since last spring, followed by record foreclosures. Most economists expect them to drop at least another 10 percent, which could leave more than 14 million households–at least 16 percent of the total–better off if they just walked away from their homes. Prices could go even lower.

Until last year, housing prices in most places had risen rapidly since the 1990s. This enabled middle-class homeowners with stagnant wages and maxed-out credit cards to keep spending by refinancing their mortgages. The housing boom also spawned the now infamous subprime mortgage–a scheme devised by Main Street realtors and Wall Street bankers to finance home buying with loans that let the borrower buy in with little money down but carried high interest rates. The expensive payments would be made later by refinancing the mortgage as prices continued to rise. These subprimes were sold to middle-class strivers upgrading to McMansions as well as to the working poor.

The increased demand pushed housing prices further into the stratosphere–until, inevitably, they fell back to earth. When the subprime borrowers could no longer make their payments, foreclosure signs went up, lowering the value of other houses in the neighborhood. The refinancing spigot shut off, retail sales sputtered and by January the economy was shedding jobs.

But it is not the squeeze on homeowners that is giving our central bankers nightmares. It is the blowback of housing deflation on the country’s massively overleveraged financial markets, which has seriously constricted the flow of credit–the lifeblood of the world’s largest debtor economy.

In a typical deal, subprime mortgages were sold to investment companies, where they were commingled with prime mortgages to back up new securities that could be touted as both safe and high-yielding. This new debt paper was then peddled to investors, who used it as collateral for “margin” loans to buy yet more stocks and bonds. At each change of hands, fees and underwriting charges added to the total claims on the original shaky mortgages. The result was a frenzied bidding up of prices for a bewildering maze of arcane securities that neither buyers nor sellers could accurately value.

Giant Ponzi scheme? Not to worry, responded the Wall Street geniuses. By spreading risks among more people, the miracle of “diversity” was actually turning bad loans into good ones. Anyway, banks were buying insurance policies against default, which in turn were transformed into a set of even murkier securities called “credit default swaps” and marketed to hedge funds, pension managers and in some cases back to the banks that were being insured in the first place. At the end of 2007 the market for these swaps was estimated at $45.5 trillion–roughly twice as large as all US stock markets combined.

This huge pyramid of debt was made possible by thirty years of relentless deregulation of financial markets, culminating in the 1999 repeal of the Glass-Steagall Act, which had prohibited banks from dealing in high-risk securities. In effect, Washington regulators became passive enablers to Wall Street’s financial binge drinkers. When they crashed–for example, in the savings-and-loan and junk-bond debacles of the 1980s, the Long-Term Capital Management collapse of 1998 and the Enron and dot-com crashes of the early 2000s–the government cleaned up the mess with taxpayers’ money and let them go back to the bar.

So here we go again. When subprime homeowners stopped paying, the prices of the mortgage-backed securities used as collateral fell. Banks demanded that their borrowers pay up or cover their margins. Panicked selling by borrowers further lowered the securities’ prices, triggering more margin calls and more defaults. Massive losses piled up at places like Citigroup, Countrywide, Merrill Lynch and Morgan Stanley, and cascaded back into the insurance companies. At the end of February, the huge insurer American International Group reported the largest quarterly loss, $5 billion, since the company started in 1919.

After some delay, the Federal Reserve Board last summer started lowering interest rates on loans to the banks. But in a phrase from the bank crisis of the 1930s, it was like “pushing on a string.” The bankers’ problem was not that money was too expensive to lend out; it was that they were afraid they wouldn’t get their money back. When they did lend, they jacked up the rates to compensate for the higher perceived risks–even to solid customers. The Port Authority of New York and New Jersey suddenly had to borrow money at 20 percent. The State of Pennsylvania couldn’t finance its college student loan program. Fannie Mae, the fund created by the federal government to support perfectly sound middle-class housing, struggled to sell its bonds.

In mid-March, after anguished discussions between Federal Reserve officials and Wall Street moguls, the Fed agreed to provide $400 billion in new cash loans to banks and investment firms. Days later came the shock of eighty-five-year-old Bear Stearns going belly up. In an unprecedented deal, the Fed immediately lent JPMorgan Chase the money to buy Bear Stearns, taking suspect mortgage-backed paper as collateral. Bear’s stockholders had already taken a hosing when the stock crashed. The big winners were the company’s creditors and insurers, who were saved from the consequences of their bad business judgment.

We are now staring into the abyss. The Bear Stearns bailout has created a presumption of a safety net under any major stockbroker, in addition to any major bank. Rumors are that Lehman Brothers and Citigroup may be next. The Fed could handle a Lehman crash. But the collapse of Citigroup, the world’s largest bank, would be catastrophic, bankrupting businesses, other banks and consumers and cutting off credit for state and local governments. And it could stretch the Fed to the limit of its resources.

There is a widespread assumption that there is no bottom to the pockets of the Federal Reserve. Not quite. The Fed has a finite amount of actual assets–mostly Treasury obligations backed by the “full faith and credit” of the government, which is a commitment to raise taxes if necessary to pay the debt. These assets total about $800 billion, some $400 billion of which have been obligated to back up loans. If the loans default, the Fed has to sell the Treasury notes in order to settle. If there are enough of these failures, the Fed could exhaust its assets. It would then have to resort to really “printing money”–issuing promissory notes not backed up by anything–or get bailed out by the Treasury, putting taxpayers further in the hole. Long before the Fed is down to the last of its stash of Treasury notes, more skittish domestic and foreign investors will flee the dollar. Interest rates would balloon and prices of oil and other imports would skyrocket. Credit would freeze, investment would plummet and tens of millions of Americans would be out on the street, with neither a job nor a roof over their heads.

Unlikely? Yes, still. Unthinkable? Not anymore. Estimates of Wall Street’s losses already run well up to $500 billion. A 20 percent drop in housing prices would translate into a $4 trillion drop in the value of housing assets. A large chunk of that loss would destroy the value that underlies the mortgage-backed securities the Fed has now agreed to guarantee.

But well short of such a worst-case scenario, the country seems headed for major economic damage that will severely test whatever we have left of safety nets. It took five years from the time the recovery began in 1983 for the unemployment rate to return to pre-recession levels. Once we reach the bottom of this trough, it could be a very long time before American consumers, whose spending accounts for some 70 percent of our economy, crawl out of the debt hole and back into the shopping mall. The Japanese have still not recovered from their similar housing/debt crash in the early 1990s.

Virtually everyone who has studied Japan in the 1990s and the United States in the 1930s concludes that in both cases the government acted too late with too little in order to stop the debt dominoes from tumbling through the entire economy.

But the American political system seems as seized up as the credit markets. As the Federal Reserve tries desperately to put an overdosed Wall Street on life support, President Bush remains dizzily detached, periodically repeating his moronic mantra against government intervention in the free market. At a press conference that is impossible to parody, Treasury Secretary Henry Paulson announced the Administration “plan” to safeguard the nation against a future crisis. It boiled down to a hope that the finance industry would do a better job of policing itself and that individual states would see to any new laws that might be needed. In what the New York Times dryly reported were his “most extensive comments to date about the credit and market problems,” Paulson, formerly co-chair of the investment firm Goldman Sachs, firmly told reporters that he was not interested in finding “scapegoats.” No kidding.

In response to pressure from Democrats, the White House at the end of January did reluctantly agree to a fiscal stimulus. But Bush demanded that it be limited to the only economic policy he understands: tax cuts. Democrats caved, and the government started printing up $160 billion in a one-time rebate to consumers and businesses, which will be sent out in May. Too little, too late, and likely to be spent paying down debt and buying more Chinese imports.

Senate majority leader Harry Reid has proposed a second round of stimulus–this time through public investment, putting people to work rebuilding bridges, schools and other infrastructure. But no one is talking about a level of fiscal injection needed to counterbalance the drop in consumer and business spending.

If we use the 1979-83 experience as a guide, we’d need some $600 billion to $700 billion in deficit spending. But in those days, the United States was still a creditor nation. Thanks to three decades of trade deficits, topped by the costs of the Iraq War, we now depend on foreign lenders, increasingly worried about the value of their US bonds. As Lee Price, chief economist of the House Appropriations Committee, put it, “We need as big a stimulus as our foreign lenders will allow us to get away with.”

To give some relief to those at the bottom of this tottering financial edifice, Barney Frank and Chris Dodd, chairs of, respectively, the House Financial Services and Senate Banking committees, are proposing updated versions of a Depression-era housing rescue program. The government would furnish $300-$400 billion to buy up existing home mortgages at prices marked down to reflect the current lower values. The plan could refinance 1-2 million homes. It may not be enough, but it probably represents the outer limit of what is possible in the twilight year of a White House whose economic competence is in the twilight zone.

Given the way Washington works, the Frank/Dodd proposal would need business support. Yet despite the fact that it would bring desperately needed trust back to the system, the capos of the Wall Street mob are unenthusiastic. Being forced to acknowledge losses on their books could toss a few more of them out of their jobs at a time when the supply of golden parachutes may be getting thin. Better to hunker down and whimper for more welfare from the Fed.

Some are already getting direct bailouts from big government. But it’s not coming from the US government. Foreign-government-owned “sovereign wealth funds” are now buying sizable equity shares to shore up battered firms. Citigroup, where the Saudis are already the chief stockholder, sold roughly $20 billion of itself to Abu Dhabi, Singapore and Kuwait. The Chinese just bought 10 percent of Morgan Stanley, and Merrill Lynch sold a 9 percent stake to Singapore. With oil above $100 a barrel, more of Wall Street is certain to wind up owned in the Middle East. Some members of Congress still warn that these countries are looking for political influence in America’s financial heart, rather than optimizing their rate of return. They are probably right, but the nationalist fires that flared up against Dubai ownership of US ports in 2006 have largely been banked. Beggars can’t be choosers.

Another hope is that the Europeans, the Chinese, whoever, will take over our role as the world’s consumer of last resort. As the recession slows US imports, countries that have grown fat on exports to us will certainly have to shift more of their growth to their own domestic market. But to expect that the leaders of other nations would put their own economies at risk by running up trade deficits in order to save us Americans from the consequences of our own folly seems stunningly naïve.

So if this is not The Big One, it is likely to be A Big One–and a long one.

We could still get lucky, of course. Republicans facing re-election might persuade Bush to support a big fiscal stimulus and housing rescue. Home prices may miraculously stabilize. Tomorrow, bankers may wake up like Scrooge on Christmas morning and just start lending. The Chinese may start importing American-made cars…

Otto von Bismarck once remarked, “There is a Providence that protects idiots, drunkards, children and the United States of America.” Let’s hope it’s still true.

With estimates of the losses from the subprime mortgage fiasco spiraling past $100 billion, Citigroup, Bank of America and similar citadels of financial genius are deep in a huddle with the Treasury over some sort of rescue operation. Pundits are shocked at the prospect of taxpayers bailing out companies whose middle managers are distraught if their year-end bonuses come to less than seven figures. After all, deregulation and global competition was supposed to banish the cozy relationship between big business and big government that justifies corporate welfare under the slogan “Too Big to Fail.”

But a look just south of the border–where Citigroup has also been making headlines–reminds us that crony capitalism is not some anomaly that rears its hypocritical head in times of financial crisis. It is built into the DNA of multinational banking.

On October 17 the Mexican government announced that a syndicate organized by Banamex, Citigroup’s Mexican subsidiary, had bid for and won at auction Aeroméxico, the country’s largest airline. Having bailed out Aeroméxico’s former owners eighteen years ago, the government owned a majority of the company’s stock, which it was now privatizing.

The news was accompanied by photo-ops of smiling bureaucrats shaking hands with happy plutocrats from the Citigroup/Banamex syndicate. Frontman for the syndicate is José Luis Barraza, a major fundraiser for Mexican President Felipe Calderón. Barraza financed the vicious campaign attack ads against leftist candidate Andrés Manuel López Obrador, which were a major factor in Calderón’s narrow and possibly fraudulent victory last year. A Mexican court later acknowledged that the ads were illegal but with a straight face declared that they didn’t affect the outcome of the election–won by 0.5 percent of the vote.

Shortly after the announcement of the Aeroméxico sale, it leaked out that Citigroup/Banamex had not been the highest bidder. Less than three minutes after its bid, the government was offered a higher price by a group headed by a businessman to whom the Mexican president did not owe any favors. The Calderonistas disqualified the higher bid on the grounds that it had come too late, i.e., after a deadline that Citigroup/Banamex had insisted the government impose. The decision violated the law, which forbids arbitrary closing of a privatization auction under such circumstances. When the losing bidder was asked if he was going to sue, he declined. He had plenty of evidence the deal was rigged, he said, but the fix was in, and there was no way he could beat the Citigroup-government alliance in a Mexican court.

As one Mexican newspaper put it, Citigroup/Banamex got control of an entire airline for practically the price of one new advanced-design airplane. Moreover, at least part of the money Citigroup/Banamex is paying the Mexican government for Aeroméxico comes from huge subsidies the bank is already receiving from–you guessed it–the Mexican government.

In 1982, when the peso crashed, the government bought Banamex as a way of rescuing the bank and its Mexican owners from bankruptcy. In 1991 Mexican President Carlos Salinas resold it for $4.6 billion to a business group headed by a close ally, Roberto Hernández. Two years later Salinas signed the North American Free Trade Agreement, which included a timetable for dismantling Mexico’s law against foreign ownership of its commercial banks. The foremost champion of NAFTA in the Clinton White House was economic adviser Robert Rubin, formerly co-chair of Goldman Sachs. When another peso crisis hit Mexico in 1994, Rubin, then US Treasury Secretary, financed a bailout of the Wall Street holders of Mexican bonds. As part of the complex deal, Salinas’s successor, Ernesto Zedillo, agreed to accelerate the opening up of Mexican banks to foreigners.

At the same time, Zedillo rescued the Too Big to Fail Banamex by buying its largely worthless portfolio of uncollectible loans–on credit. Mexican taxpayers are still paying Banamex interest for the government purchase of the bank’s junk securities a dozen years ago. The exact amount of the subsidy is buried in obscure government accounting, but a 2004 estimate was that the government still “owed” Banamex roughly $4 billion.

In 2003 the Mexican government subsidy to the banking industry–by then almost totally owned by foreign corporations–was three times what it was spending on roads, school buildings, health facilities and other infrastructure. This, in a country where 42 percent of the people don’t earn enough to support a minimum Mexican market basket of food, clothing and other essentials.

In 1999 Rubin resigned as Treasury Secretary to become chair of the executive committee of Citigroup. Two years later, shortly after the date on which Mexico had to open up its banks to foreign ownership, Rubin flew to Mexico to buy Banamex for $12.5 billion plus a seat on the Citigroup board for Hernández. The Mexican press reports that the well-connected Hernández masterminded the Aeroméxico deal, which will provide Citigroup/Banamex with substantial revenues from financing airplane leases and insurance, along with being the preferred banker for the airline’s suppliers.

As the icing on this very lucrative cake, the Calderón government decided that the Citigroup/Banamex gang should not have to pay the normal sales tax. Sales taxes, it was explained with a straight face, really fall on the seller, not the buyer (try this out next time you go to the store), and since the seller was the government, there is no point in the government paying the sales tax to itself. Neat. No wonder the Citigroup board just elected Rubin to be its chair.

So here is your global free enterprise system (a k a socialism for the rich) at work: Citigroup/Banamex, which is Too Big to Fail in the United States, has also been deemed Too Big to Fail by the Mexican government and is being subsidized by Mexican taxpayers to buy Aeroméxico, also Too Big to Fail.

The World Bank, IMF and other neoliberal hangouts are still pushing developing countries to open up their financial markets to multinational banks, precisely on the grounds that it will eliminate crony capitalism. The idea, you see, is that these global wheeler-dealers will bring First World standards of competence to the Third World. And so they have: Banamex, like its Citigroup owner, just posted a massive loss for the last quarter. It seems Banamex has also been pushing subprime loans, via credit cards, to people who don’t earn enough to pay them back.

Citigroup, by the way, operates in more than 135 countries. Taxpayers of the world: hold on to your wallets.

One of the greatest achievements of the twentieth century was a social contract that provided far more economic security and prosperity for working Americans than had existed in any previous period. But successive waves of changes in the world economy, together with the ascendancy of a strain of economic philosophy that puts the freedom of capital above the interests of society, have placed enormous strain on the postwar social contracts of all Western countries, resulting in stagnating wages, greater insecurity and levels of income and wealth inequality not seen since the early 1900s. And even more far-reaching challenges arising from the current pattern of globalization, with its emphasis on the outsourcing of service as well as manufacturing jobs, may lie ahead.

Developing a strategy for taming global capitalism anew therefore constitutes the overriding challenge of our time. For that reason, we have invited some of the leading progressive thinkers in this country and a longtime observer of the American economy to offer their ideas on how the United States, as the major capitalist country and the major player in globalization, could reshape both capitalism and globalization in ways that build a new social contract serving the needs of working people everywhere.–The Editors

A Progressive Response to Globalization

JOSEPH E. STIGLITZ

Globalization is often viewed as posing a major threat to “capitalism with a human face.” Trade liberalization puts downward pressure on unskilled wages (and increasingly even skilled wages), increasing inequality in more developed countries. Countries trying to compete are repeatedly told to increase labor-market flexibility, code words for lowering the minimum wage and weakening worker protections. Competition for business puts pressure to reduce taxes on corporate income and on capital more generally, decreasing funds available for supporting basic investments in people and the safety net. And international agreements, such as Chapter 11 of NAFTA and the intellectual property provisions of the Uruguay Round of trade talks, have been used to short-circuit national democratic processes.

Yet Sweden and the other Scandinavian countries have shown that there is an alternative way to cope with globalization. These countries are highly integrated into the global economy; but they are highly successful economies that still provide strong social protections and make high levels of investments in people. They have been successful in part because of these policies, not in spite of them. Full employment and strong safety nets enable individuals to undertake more risk (with the commensurate high rewards) without unduly worrying about the downside of failure. These countries have not abandoned the welfare state but have fine-tuned it to meet globalization’s new demands. We should do the same.

At the same time, we must temper globalization itself–not by withdrawing behind protectionist borders and not by trying to enhance the well-being of our citizens at the expense of those abroad who are even poorer. Rather, we should reshape globalization to make it more democratic, and we should moderate its pace to give countries more time to cope. There will still be losers in a reshaped globalization, but the vast majority of citizens in both the North and the South will be better off with the right policies.

Coping with globalization entails recognizing both the consequences of globalization and the limitations in the standard responses. Increased education is important, but it is not enough. At this time we should make taxation more progressive in order to offset the economic forces increasing inequality, not decrease the degree of progressivity as we have done in the past five years. We should strengthen our safety nets, not weaken them. The United States has one of the worst unemployment insurance programs in the advanced industrial countries. A redesign of our social insurance program to make it more of an integrated lifetime social insurance program, along the lines of the provident funds of Singapore, could provide substantially more complete insurance coverage without weakening economic incentives.

Most important, we should have a true commitment to full employment. The high priests of the financial markets have convinced many of the dangers of even moderate inflation, contending that even slight increases in inflation are very costly, especially to the poor, and that the costs of reversing inflation are extremely high. This is all nonsense, as we demonstrated in successive issues of the Economic Report of the President while I was chair of the Council of Economic Advisers. Today we should be worried not about inflation but about our lackluster growth, which leaves a large “jobs deficit.” Full employment is the most important social protection. And even moderate unemployment, even of the disguised kind (discouraged workers, increased numbers on disability and large numbers who work part-time involuntarily), puts downward pressure on wages, exacerbating the problems brought on by globalization.

There are two other elements of a progressive agenda that are sometimes not given sufficient attention. The first is enhancing savings among lower-income individuals, including by matching grants (for example, by cashable tax credits). Some conservatives have embraced the concept of the ownership society–by which they too often mean simply that those who own more get to own still more. But it is important for individuals of modest means to have a cushion to protect themselves against the vagaries of the market.

The second is enhancing investment in research, strengthening our competitive advantages, so necessary if we are to maintain robust growth. Today, a disproportionate amount of our nation’s research budget is spent on military objectives; funds for basic science, or even advances in applied technology that would improve living standards and help us protect the environment, are scarce.

Globalization’s advocates often portray it as presenting unprecedented opportunities. For those committed to creating a society based on principles of social justice, it is also presenting unprecedented challenges. These are some of the elements of the progressive response to these challenges.

Joseph E. Stiglitz, University Professor at Columbia University, won the Nobel Prize for Economics in 2001 and is the author of The Roaring Nineties.

A New Domestic and Global Strategy

THEA LEE

The challenge we face today in the United States is how to engage in the global economy without decimating our own middle class and gutting our social regulatory system. The logic of global capitalism as currently practiced is to drive down workers’ wages, weaken their bargaining power and strip away their social protections in both rich and poor countries, while simultaneously encouraging and celebrating the excesses of debt-driven consumerism.

But this system is inherently unstable and unsustainable. The United States is running a current account deficit of more than $700 billion a year to fund consumption we can’t afford. This is not financially sustainable. Meanwhile, many workers in developing countries work twelve to sixteen hours a day, in dangerous conditions, without the right to form an independent union, at poverty pay, so that multinational corporations can boost their bottom line. That is not politically sustainable.

Any policy agenda to build a better system must have both a national and an international component. At the national level, we need to fight for workers’ rights to form unions and bargain for decent wages and working conditions; we need affordable and equitable healthcare and retirement security systems that do not create competitive disadvantages for domestic companies; and we need to invest in education, technology and infrastructure, especially in manufacturing.

While national reforms are critical to improving workers’ daily lives, we must not ignore the global component, because if we don’t get that piece right, unregulated global competitive pressures will eventually undermine any domestic reforms and worker gains. Trying to protect the American middle class without changing our interaction with the global economy is like pouring water into a leaky vessel.

For the United States, there are three key components to a new global strategy: taxes, currency and trade rules. In order to bring about real change, we need to work with domestic businesses as well as with our global justice allies. Domestic producers are equally frustrated by US policies that make it virtually impossible for them to compete in the global economy while producing on American soil.

First, our corporate tax system is insanely inefficient and unfair. American taxpayers currently subsidize the offshoring of their own jobs (at a rate of at least $7 billion a year) through policies that exempt income earned offshore from corporate taxes. Very few other countries have similar systems, and most have some form of “border adjustable” tax that exempts exports from sales or value-added taxes. Our current system taxes exports, while subsidizing the offshoring of jobs. We need a complete overhaul of our corporate tax system to address this self-inflicted wound.

Second, the overvalued dollar is killing our domestic manufacturing sector and exacerbating the problems in tradable services (a category that now covers everything not nailed to the floor). While the high dollar policy serves the Wal-Marts of the corporate world very well, it creates almost insurmountable competitive problems for domestic producers. The Bush Administration has clearly decided to cater to the retailers, outsourcers and importers. It is now up to Congress to pass legislation that will force China and Japan to stop manipulating their currencies to gain competitive advantage.

Third, the framework of rules in the global trading system (through the WTO and our own domestic agreements) is severely lopsided in favor of multinational corporate interests–leaving workers, small farmers, the environment and the poor ever more vulnerable and weak. If we understand the central problem of the global economy to be one of an imbalance of power and income distribution, then it becomes clear that global trade rules need to be rewritten to insure that workers have a voice at their workplaces and in national political debates. Linking core workers’ rights as defined by the International Labor Organization to market access would do three important things: It would empower workers and give them a fighting chance to bargain for their fair share of the wealth they create; it would help build a middle class, so that workers can buy some of the goods they produce; and it would put a leash on multinational corporations by taking the profit out of exploitation.

No single action will get us out of the hole we’re in, but together these tax, currency and trade policy pieces point us in the right direction.

Thea Lee is policy director of the AFL-CIO.

Re-creating Public-Interest Politics

WILL HUTTON

Looked at from Europe and Asia, the US economy has emerged as a formidable global competitor with the leading brands, the leading technologies and a careful strategy of producing low-value-added goods in Asia while nurturing high technology at home. If American blue-collar jobs have been lost in mass-production manufacturing, they have been created in distribution, transportation and services–and also in the high-value-added “knowledge economy.”

Thus American blue-collar workers are split into four components: those under direct competition from Asia, those working in the blue-collar service sector, those directly or indirectly benefiting from high-value-added knowledge work and those who work in the public sector. Each component is in very different circumstances–and even in the public sector, the appeal of trade unions and collective action is fading. Democrats have allowed too many of these new categories of workers to be recruited to the Republican cause with their redefinition of the public interest as private. The repercussions for the battle of ideas have been global.

The first task in any rebirth of liberal politics is to recognize contemporary realities–the primacy of a highly individualized culture with a highly segmented working class with very different objective interests–and not hanker to re-create an order that is past. Liberals need to be clear-eyed about the extent to which the current world system benefits the United States; for example, Chinese goods are cheap, boost real incomes and create a disinflationary climate of low interest rates that has provided a massive economic stimulus. Protection might benefit one of the four components of the working class–those in direct competition with Asia–but it would hurt the other three, not to mention poverty-stricken Asian peasants now delighted to have the opportunity for self-improvement.

The second task is to understand that winning the argument at the big political level, as much as detailed policies, is a condition for winning power. In this regard, what has to be done is not to make the case for “government” or “collective” action, which goes against the contemporary grain of American political culture, but to recapture the idea of the public and the importance of the public institutions through which it is delivered. For example, American universities–among the country’s great public institutions–are the envy of the world, but they have increasingly become the preserve of the children of a rich elite who can afford the stunning fees, with a consequent alarming reduction in social mobility. They must be reclaimed; even the top private universities recognize the “publicness” of their vocation and the degree to which the “public” is currently being corrupted. Social mobility is a public interest, and its decline is of public concern. The argument needs to be made in those terms.

I would go further still. The United States was colonized by the values of the Enlightenment and its commitment to reason, to checks and balances in government, and to the importance of a lively public sphere. It was these Enlightenment values interacting with the great nineteenth-century egalitarian tradition that gave the United States its dynamism as much as its go-getting capitalism. Now the values of the market and increasingly religion have been allowed to crowd out the vitality of the entire fabric of Enlightenment institutions. The liberal case surely has to be to reassert why these institutions are so important and to remake the case in today’s context–hence the instinctive liberal support for open-sourcing, the public dissemination of knowledge and the fair distribution of access to information. I would also add the old progressive case against excessive corporate power and breathe life into the Sherman and Clayton acts. Trustbusting and taking on the creationists are essential parts of the story.

We also need to revive institutions of grassroots altruism and solidarity. Nowhere in the industrialized West has the progressive cause gone far without the support of organized labor; but the conventional trade union no longer captures the imagination or hearts of working people. Only when unions start growing with a much more clearheaded sense of what their members want and what can be delivered will there be a more secure political base.

But it all starts with associating liberals with the idea of the public in its best Enlightenment sense, showing how that has worked for the United States in the past and could work for it in the future.

Will Hutton, a British writer, is the author of A Declaration of Interdependence (Norton) and is completing a new book on China and the United States.

Taming Predatory Capitalism

JAMES K. GALBRAITH

In 1899 Thorstein Veblen described predation as a phase in the evolution of culture, “attained only when the predatory attitude has become the habitual and accredited spiritual attitude…when the fight has become the dominant note in the current theory of life.” After an entire century’s struggle to escape from this phase, we’ve suffered a relapse. The predators are everywhere unleashed; and the institutions built to contain them, from the United Nations to the AFL-CIO to the SEC, are everywhere under siege. Predation has again become the defining feature of economic life. Our first problem is to grasp this reality in full.

Postwar prosperity was built on a vast cut in the cost of security and the achievement of peace in Europe and much of Asia. The American role in the cold war system was to provide security; for this the dollar’s role as anchor of the world trading system was our reward. But now, with Iraq, we are seen worldwide as the leading predator state, promoting war as a solution rather than as the ultimate economic and human horror. For this, many would like to see our privileges revoked.

Corporate and financial fraud and political corruption form the second great domain of predatory capitalism. DeLay, Frist and Abramoff are the names in the news, but the tone is set by the leadership–Cheney of Halliburton and Bush of Harken Energy–a large predator and a small scavenger, specialists in cronyism and expert in nothing else. When predation becomes the dominant business and political form, the foundation of capitalism crumbles. Markets lose legitimacy, investors fly to safety in bonds, and authentic innovation and shared growth both become unattainable. The solution must be not just a change of parties but a new political class, including a new media not under corrupt control.

Then there is the predatory attack on unions and labor, in which many economists are complicit. This is far advanced in America and most visible today in Europe, as reflected by the doctrine of flexible labor markets, which claims that the conquest of unemployment requires cutting the pay of the working poor. But there is no history of unemployment ever being conquered this way–certainly not in the United States of the 1940s, 1960s or 1990s. Modern Europe also affords counterexamples of equalizing growth, from Norway and Denmark to recent gains in Spain, as well as object lessons, most recently in France, of the catastrophe of designed exclusion.

The way forward is a program for growth and justice built on the needs of the working population and the middle class. To begin with, in the United States there must be a powerful demolition of the old political order: We need elections where all votes are cast and counted. The campaign against voter repression is the essential civil rights struggle of our time, even though most progressives don’t seem to realize it yet. Prevailing will require fundamental reform such as the introduction of nationwide vote-by-mail (the Oregon system). Without that, and also many relentless prosecutions, nothing else will be achieved.

The economic commitment, in turn, must be to full employment here, to egalitarian growth in Europe and Japan, and to a worldwide development strategy favoring civil infrastructure and the poor. Public capital investment, stronger unions and a high minimum wage should frame the domestic agenda. Overseas, crackdowns on tax havens and the arms trade, a stabilizing financial system and an end to the debt peonage of poor countries should be among the priorities of a new structure.

The truths are that egalitarian growth is efficient, that speculation must be regulated, that crime starts at the top and that peace is the primary public good. These truths are poison to predators and are the reason predators have fostered and subsidized an entire cynical intellectual movement devoted to “free” markets made up of a class of professor-courtiers now everywhere in view. Taming predatory capitalism could start with breaking this econo-corporate analytical axis, and reviving the concept of countervailing power, first formulated by John Kenneth Galbraith in 1952.

James K. Galbraith, chair of the board of Economists for Peace and Security, teaches at the University of Texas and is senior scholar with the Levy Economics Institute.

A North American Social Contract

JEFF FAUX

Social justice will come to the global economy only when enough people in enough nation-states are organized across borders to demand it. Yet in a world of 6.5 billion people in more than 200 separate countries–representing wide differences in culture, living standards and political consciousness–the idea of a popular transnational politics effective enough to humanize the relentlessly interconnecting markets seems impossibly utopian.

But if we think of establishing a global social contract as a step-by-step process, in which political solidarity is built first among neighboring societies, region by region, it becomes easier to imagine. The ongoing struggle for a “Social Europe” to match the expanded European capitalist market offers the best real-world example of the promise of a regional social contract.

We should open up a second front in this global class war in North America. The North American Free Trade Agreement was the template for the neoliberal global project. In its protection of corporate interests and its undermining of democracy, NAFTA is even more reactionary than the World Trade Organization. Not surprisingly, it has reinforced inequality and insecurity in all three countries–most visibly demonstrated by the daily migration of Mexicans across the border, desperately seeking jobs. NAFTA’s failure makes North America a microcosm of globalization’s Catch-22: Bringing social justice to global markets requires global institutions to regulate global business, but these institutions are dominated by elites who oppose social justice.

After twelve years, integration among the three North American economies has gone too far to reverse. So it is time for progressives in all three countries to mobilize together to promote a social contract on their own continent. This does not mean merging into one country. Rather, it means the creation of a cross-border political movement to challenge the agenda of elites in all three countries, who established NAFTA precisely to escape democratic constraints on their wealth and power.

The problems of developing political solidarity across North America’s national borders are different from but not necessarily more difficult than those encountered among the twenty-five countries that now make up the European Union. A cross-border movement could build on the many organizational and personal relationships that already exist. Early steps to gain experience and trust could include joint actions against corporate abuses that span the continent. A simultaneous strike against a common employer or a protest against a common environmental abuse could dramatize the interests that people in all three countries share. Progressives could develop a common legislative agenda, introducing the same proposals in all three legislatures. This agenda might come to form the basis of a new North American social contract that would include the following elements:

§ A Bill of Rights for citizens of North America, enforceable in all countries, that would reassert the primacy of civil protection of individuals and democratic government over the extraordinary privileges NAFTA gives to corporate investors.

§ A New Continental Deal, in which Canada and the United States commit substantial long-term aid to Mexico in order to nurture higher and sustainable economic growth while Mexico commits to policies (independent trade unions, minimum wages, equitable taxes) that assure a wider distribution of the benefits of growth.

§ A Continental Development Strategy that shifts the economic policy objectives of all three countries from subsidizing pursuit of global profits by corporate investors to support of greater industrial self-sufficiency, resource conservation and increased investment in health and education. Driven by these goals, a progressive North American Customs Union would manage modest levels of balanced trade with the rest of the world.

Creating a politics around such a continental social contract could help inspire progressive activists to develop their own common vision of the future to replace NAFTA’s nihilist nightmare of unregulated capitalism. Such a movement would also help reinforce beleaguered progressives in Europe, South America and Southeast Asia (China and India are regions in themselves), who are trying to bring to life regional models of development that respect human life and dignity. Finally, it could help undercut American elites’ messianic illusions of their moral right to rule the world–which infects liberals as well as conservatives–and force them to turn to the humbler but more productive task of making their own part of the globe a better place.

Jeff Faux was the founder and is now di stinguished fellow at the Economic Policy Institute. His latest book is The Global Class War.

Build the High Road Here

JOEL ROGERS

American progressives have lots of ideas on the alternative international rules and institutions in monetary policy, finance, trade, human rights and development needed to make globalization work better for the North and South. What we lack is the power to implement them. Under the “dictatorship of no alternatives” that defines current policy debates, it is important to propose one to the fraying “Washington Consensus” and seek allies, particularly in this NAFTA hemisphere, in its enactment. But we should not wait on international reform to build democratic power in this economy, starting from where we are right now. We should build a high-road–high-wage, low-waste, democratically accountable–economy right here. Doing so will give focus to domestic efforts, connect them practically to international ones and eventually yield the organization, experience and confident social base we want to contribute to global fights. Building the high road here should be at least half of any international strategy.

Of course, some progressives think internationalization already dooms this enterprise–that capital’s mobility will defeat any attempt at increasing democratic control over the economy. But they’re mistaken. Economies don’t just slide around on a frictionless, flat world. They have gravity and traction. The economic importance of place hasn’t been destroyed by internationalization but in many ways has increased. Capital markets are far from perfect, and capital is less mobile than commonly assumed. And some constraints on capital are actually a net gain to it, not a loss.

Around the country, hundreds of largely isolated projects are already showing this. They include worker-training and skill-certification programs that increase productivity while capturing it in income; the use of union pension funds to stabilize and grow distressed local economies while generating returns on investment; “smart growth” policies that reduce commuting times and lower real housing costs while improving the environment; living-wage and allied efforts to raise standards on company performance while increasing productivity; and the Apollo Alliance program for good jobs and energy independence. These efforts are considered by many progressives to be a sidebar to their main show and usually not even as a single class of activities. In fact, they are all examples of the high-road politics we should be pursuing.

This harnesses democracy as a force of production, a source of value, and not just values in the economy. It builds productive infrastructure (in part physical, in larger part institutional) that adds value, reduces waste and captures the benefits of doing both. Such infrastructure attracts capital by increasing its return but also grounds capital by its own immobility. And with capital’s exit threats thus reduced, real bargaining can again begin. The essence of that bargaining is demanding more of capital than is now demanded by markets–less pollution, higher wages, better labor relations, more community investment–in exchange for the infrastructure that allows capital to meet the demands profitably under competitive conditions.

None of this is rocket science. We already know how to add value in places by improving education and worker training; increasing research and commercialization capacity; providing the marketing, financial and other business services that are beyond the capacities of individual firms; and helping to cluster firms to realize complementary strengths while enlisting workers in their upgrading. We know how to reduce waste by establishing markets and making direct investment in renewable energy and more resource-efficient–and, with accurate accounting, much cheaper–energy, housing, transportation and consumer durables. We know how to improve government efficiency by democratizing elections, applying the private sector’s metrics revolution to its operations and engaging citizen organizations in open-source problem-solving and regulatory enforcement. Doing these things together improves living standards by strengthening democracy. It shows democracy as a solution in organizing daily life, not part of the problem.

This is not a new insight. Markets can’t set rules for themselves, solve their collective-action problems or elicit wide voluntary citizen contribution. Democracy’s ability to do them all is its signature strength, and there are no limits on their being done better and better–thus producing more wealth, more citizen engagement and wider freedom in future choice. This directly helps immobile workers, even under internationalization. Indeed, even in the “worst case” of perfect competition, with instantaneous capital adjustment to changes in expected after-tax rates of profit, all gains from such place-based democratic efficiency would go to the immobile workers who call those places home.

Neoliberalism declares unfettered business domination our best bet for material well-being. We should declare high-road democracy a better bet, and invite others to place it with us. We will not lack for takers in the United States. Americans are sick to death of “business as usual,” and desperate for an alternative that works. And our working class wants more of government than death and taxes, more of life than their irrelevance, more of their “leaders” than fake empathy and real contempt. A role in constructing a better economy, and a society fit to live in, is what paving the high road provides.

Joel Rogers, a Nation contributing editor, teaches at the University of Wisconsin.

Universal Capitalism

MARCELLUS ANDREWS

The non-college-educated majority of working Americans, and increasingly even some college-educated workers, face two long-term problems. First, the buying power of their wages cannot keep pace with the cost of the things they need, including healthcare, housing and schooling. Second, their path to upward economic mobility is disappearing because stagnant and falling real wages combined with ever more severe economic segregation limit their ability to invest in themselves or their children, whether alone or collectively, because of the weakened tax base of working-class communities.

It is very difficult to find a way to reverse the downward pull of globalization and global labor migration on the wages of modestly educated people. But that does not mean that we are without a way of improving the standard of living of working people. Ironically, the problem may provide its own solution. Let me explain. Contemporary economic trends are pushing the wages of workers down while boosting the returns to financial capital and knowledge capital. That being the case, the best way to promote economic opportunity for low-wage workers and especially their children is to pioneer collective forms of capital ownership and wealth accumulation. In short, we should work to make every American a capital owner.

One way to proceed is for the federal government to reserve a portion of each year’s tax receipts–say, 1 percent of GDP–for contributions into a collective capital account that is invested in a set of privately managed and federally supervised index funds. This capital fund, which I will call the Opportunity Fund, would be a trust fund completely free of government interference, subject to the same rules and regulations as other index and mutual funds. With contributions of tax receipts each year, its value would grow as the financial wealth of the country and the economy grows, generating not only capital gains but also interest and dividend income for the American people.

The interest and dividend income generated by the Opportunity Fund could be used in a variety of ways. It could be used to supplement working families’ wage income by providing the funds needed for a basic annual income payment, whose size could vary according to such criteria as age, number of children and income level (perhaps with a work requirement to avoid dependency problems). It could also be used to fund a child savings account system that builds up an inheritance for every child on a progressive basis, with a larger share of the funds going to children from poorer families. The child savings account could be used when a person reaches age 18 or soon thereafter to pay for college, buy a home or establish a retirement nest egg, or to pursue some other approved investment purpose.

The Opportunity Fund form of universal capitalism is, in short, a method for redistributing capital income through collective savings. It could put a more sustainable floor on the income of workers than does our collapsing welfare state. It could provide the financial basis for the children of every working family to be able to invest in their own human capital and their own economic future. It could also help correct the problem of economic and wealth inequality by creating a system of public inheritance that would help those who are not lucky enough to have been born into families that can pass on wealth to their children.

The Opportunity Fund is viable, practical and eminently doable right now. It is also the best way–perhaps the only way–to meet all of our country’s most pressing economic and social objectives. Not only must we promote fairness within and between generations; we also need to save more and borrow less (subject of course to Keynes’s lesson that too much saving too fast can cause recession and unemployment) so our country will have a more sustainable financial future. And we must also rebuild our economy by investing more in order to be able to better compete in today’s world economy. The Opportunity Fund form of universal capitalism is an idea whose time has come because it can meet these objectives better than the current collapsing social welfare system.

Marcellus Andrews is the author of The Political Economy of Hope and Fear: Capitalism and the Black Condition in America.

Reform the International Financial System

JANE D’ARISTA

President Richard Nixon’s decision to end the Bretton Woods agreement in 1971 was a milestone in the erosion of the Western social contract. This decision ushered in a new international monetary system–one in which international payments in dollars would be made by private banks rather than exchanges of gold between the Federal Reserve and other central banks, and the value of the dollar would be determined by supply and demand.

This new dollar-centric international monetary system has been a powerful force in shaping the global economy and is, to a great extent, responsible for the current pattern of globalization. For the United States, it has meant that US policy-makers have had to hold real US interest rates higher than those of other strong currencies and have had to accept a higher value of the dollar relative to other major currencies. This has not only led to slower US economic growth but has made US goods less competitive vis-a-vis those of other economies. Thus the cost of American dollar hegemony has been the loss of export markets and, along with it, the loss of relatively good jobs in the tradable-goods sector of the economy.

For developing countries, the consequences have been no less serious. The post-Bretton Woods system has pushed more and more economies toward export-led growth, which tends to suppress domestic wages and regulatory standards. Countries that cannot pay for imports and attract foreign investment in their own currencies must “earn” these external currencies, mainly dollars, by exporting more than they import to one or a few countries that issue the global means of payment. To remain competitive with other nations and insure continued access to these markets, they have adopted policies that maintain downward pressure on wages and exchange rates and have shunned those that stimulate the demand necessary for sustained development.

This export-led growth paradigm created by the current international monetary system appears to have benefited the United States, the key currency country, especially in recent years, enabling us to consume more than we produce. A large share of the dollars that flow out of the United States to pay for imports flows back as investments in US financial assets. This foreign investment expands credit and allows Americans to spend more and save less. It also makes many Americans feel wealthier than they actually are by fueling inflated real estate and equity prices. But the cost of this pattern of growth has been the rapid buildup of both domestic and external debt.

This extraordinary growth in both US domestic and external debt now raises questions about the sustainability of this paradigm. Will highly indebted US households be forced to reduce their spending? If so, will a fall in imports reduce foreign financial investment, raise interest rates and induce or exacerbate a recession? And if the United States does, in fact, falter in its role as buyer of last resort in the global economy, what policies in which countries will insure continued growth?

To build a new global social contract, the underlying logic of the international financial system must be radically altered. What is needed is a new international monetary regime that can open access to international trade and investment for all nations on equal terms by allowing all currencies to be used in cross-border as well as domestic transactions. Keynes’s international clearing agency could serve as a basic structure for such a system, reclaiming the public sector’s role in global payments through a process of debiting and crediting cross-border payments against reserve accounts held with the clearing agency by member countries, with changes in reserves used to determine periodic adjustments in exchange rates.

An international monetary system based on the idea of an international clearing agency could also be designed to create a true lender of last resort, replacing the current ad hoc facilities, which depend on taxpayer donations. This would provide an effective channel for containing damaging financial crises and maintaining the financial stability needed for balanced growth in the global economy. It would also permit a resumption of the demand-led growth policies that are a necessary support for a new, global social contract.

Jane D’Arista is an author, lecturer and former Congressional staff economist who writes for the Financial Markets Center.

The world’s movers and shakers are convening once again in January at the annual World Economic Forum in Davos, the posh ski resort nestled in the Swiss Alps. Attendance is invitation-only, enforced by police barricades, razor wire and the latest high-tech military hardware to guard against terrorists, protesters and curious local citizens.

Some 2,000 people will show up to discuss the world’s problems as defined by those who own and manage the great global concentrations of wealth (Microsoft, Citigroup, Siemens, Nestlé, Nomura Holdings, Saudi Basic Industries, etc.). Their guests include prominent political leaders, international bureaucrats, academics, consultants and media pundits–with a few NGO and labor union officials sprinkled along the edges to demonstrate diversity.

Davos is not the place for secret conspiracies. More than 200 hovering journalists will dispatch to the world’s citizens breathless accounts of the chatter and charm of the masters of the economic universe. Davos is rather the most visible symbol of the virtual political network that governs the global market in the absence of a world government. It is more like a political convention, where elites get to sniff one another out, identify which ideas and people are “sound” and come away with increased chances that their phone calls will be returned by those one notch above them in the global pecking order.

Americans are of course prominent members of this “Party of Davos,” which relies on the financial and military might of the US superpower to support its agenda. In exchange, the American members of the Party of Davos get a privileged place for their projects–and themselves. Whether it’s at Davos, at NATO headquarters or in the boardroom of the International Monetary Fund, heads turn and people listen more carefully when the American speaks.

“Davos Man,” a term coined by nationalist scholar Samuel Huntington, is bipartisan. To be sure, Democrats tend to be more comfortable with the forum’s informal seminar-style and big-think topics like global poverty, cultural diversity and executive stress. Bill Clinton goes often, and Al Gore, John Kerry, Robert Rubin, Madeleine Albright, Joe Biden and other prominent Democrats are familiar faces. Republicans generally prefer more private venues. George W. Bush, of course, doesn’t do anything unscripted. But people like Dick Cheney, Newt Gingrich, John McCain and Condoleezza Rice have all worked the Davos circuit.

That the global economy is developing a global ruling class should come as no shock. All markets generate economic class differences. In stable, self-contained national economies, where capital and labor need each other, political bargaining produces a social contract that allows enough wealth to trickle down from the top to keep the majority loyal. “What’s good for General Motors is good for America,” Dwight Eisenhower’s Defense Secretary famously said in the 1950s. The United Auto Workers agreed, which at the time seemed to toss the notion of class warfare into the dustbin of history.

But as domestic markets become global, investors increasingly find workers, customers and business partners almost anywhere. Not surprisingly, they have come to share more economic interests with their peers in other countries than with people who simply have the same nationality. They also share a common interest in escaping the restrictions of their domestic social contracts.

The class politics of this new world economic order is obscured by the confused language that filters the globalization debate from talk radio to Congressional hearings to university seminars. On the one hand, we are told that the flow of money and goods across borders is making nation-states obsolete. On the other, global economic competition is almost always defined as conflict among national interests. Thus, for example, the US press warns us of a dire economic threat from China. Yet much of the “Chinese” menace is a business partnership between China’s commissars, who supply the cheap labor, and America’s (and Japan’s and Europe’s) capitalists, who supply the technology and capital. “World poverty” is likewise framed as an issue of the distribution of wealth between rich and poor countries, ignoring the existence of rich people in poor countries and poor people in rich countries.

The conventional wisdom makes globalization synonymous with “free trade” among autonomous nations. Yet as Renato Ruggiero, the first director-general of the World Trade Organization, noted in a rare moment of candor, “We are no longer writing the rules of interaction among separate national economies. We are writing the constitution of a single global economy.” (Emphasis added.)

On the board of many transnational companies, Ruggiero has been both trade and foreign minister in the Italian government of right-wing businessman Silvio Berlusconi. He is now the chair of Citigroup’s Swiss subsidiary. His fellow authors of the Davosian constitution have similar résumés, tracking careers that flow easily across borders and between public and private sectors. After just stepping down as German chancellor, Gerhard Schröder has become board chair of a Russian company building a gas pipeline that Schröder himself had negotiated while in office. And so it goes.

In the absence of global democracy, the forces that act as counterweights to the power of the investor class in national economies–labor, civil society and progressive political parties–are too weak and unorganized to create a global social contract. What might be called the “Party of Porto Alegre”–the NGO activists of the World Social Forum, who also meet annually (usually in Brazil, this year in Venezuela, Mali and Pakistan) in January–is hardly a match for Davos. It is therefore no surprise that the constitution of the world economy protects just one class of global citizen–the corporate investor.

Given the influence of American elites, the model for this constitution is the North American Free Trade Agreement, conceived under Ronald Reagan, nurtured by George H.W. Bush and delivered by Bill Clinton. Among other things, NAFTA’s 1,000-plus pages give international investors extraordinary rights to override government protections of workers and the environment. It sets up secret panels, rife with conflicts of interest, to judge disputes from which there is no appeal. It makes virtually all nonmilitary government services subject to privatization and systematically undercuts the public sector’s ability to regulate business. Jorge Castañeda, later Mexico’s foreign secretary, observed that NAFTA was “an agreement for the rich and powerful in the United States, Mexico and Canada, an agreement effectively excluding ordinary people in all three societies.”

In the fall of 1993 a corporate lobbyist, exasperated by my opposition to NAFTA, stopped me in the corridor of the Capitol. “Don’t you understand?” she demanded. “We have to help [then-Mexican President Carlos] Salinas. He’s been to Harvard. He’s one of us.”

Her reference to “us” seemed odd. Neither she nor I was a Harvard graduate. So it took me a while to get her point: “We” internationally mobile professionals had a shared interest in liberating similarly mobile global investors from regulations imposed by national governments on behalf of people who were, well, not like “us.” Despite the considerable social distance between Salinas and both of us, she was appealing to class solidarity.

It’s impossible to understand why Democratic Party leaders collaborated with Republicans to establish NAFTA unless reference is made to cross-border class interests. There was no compelling economic or political reason for Bill Clinton to make NAFTA a priority in his first year as President. In economic terms, nothing was broken that needed fixing. Politically, NAFTA and the WTO that followed traded away the interests of the Democratic Party’s blue-collar electoral base while creating a bonanza for Republican constituencies on Wall Street and in red-state agribusiness.

But Clinton was more Davos than Democrat. Tutored by financier Robert Rubin, a prodigious fundraiser who became his Treasury Secretary, Clinton embraced a reactionary, pre-New Deal vision of a global future in which corporate investors were unregulated and the social contract was history. Indeed, in all three countries it was the leaders of the political parties that had historically claimed to represent ordinary people–the Democrats’ Clinton, the Liberal Party’s Jean Chrétien and the Institutional Revolutionary Party’s Salinas–who delivered NAFTA to their global corporate clients, undercutting their own constituencies. “NAFTA happened,” said the then-chairman of American Express, “because of the drive Bill Clinton gave it. He stood up against his two prime constituents, labor and environment, to drive it home over their dead bodies.”

A year later, in November 1994, enough angry Democratic voters stayed away from the polls to give the Republicans control of the House. Since then, many working-class Americans, feeling abandoned by the Democrats, have responded to the Republican definition of class struggle as a fight over gun control, school prayer and abortion. The Democrats have still not recovered.

Consistent with a deal among the rich and powerful, NAFTA made the distribution of income, wealth and political power more unequal throughout the continent. In all three countries, wages in manufacturing fell behind productivity increases, shifting income from labor to capital. Ordinary Mexicans especially went through the economic wringer–to which the willingness of hundreds of thousands of them to risk their lives each year crossing the border continues to be tragic testimony.

On the other hand, opportunities blossomed for the rich and powerful in all three nations. American and Canadian investors got access to cheaper labor and privatized Mexican companies, while Mexican oligarchs got to broker the deals. One example was the way NAFTA was used to open up Mexico’s banking system to foreign ownership, profiting elites on both sides of the border.

The governments of Carlos Salinas and his successor, Ernesto Zedillo–hailed in Washington as great free-market reformers–privatized government-owned banks, turning them over to business cronies, and, through NAFTA, revoked the legal ban on foreign ownership. When the banks started to fail, they were given huge government subsidies to make them attractive to transnational buyers. At the same time, the “reform” government was slashing subsidies to the poor for food and medicine.

Banamex, the country’s second-largest bank, was bought by a Mexican syndicate, owned by Salinas pal Roberto Hernandez Rodriguez, for $3.2 billion and when, thanks to NAFTA, foreigners were allowed to own Mexican banks, it was resold to Citigroup for $12.5 billion. Robert Rubin negotiated the deal for Citigroup, where he had gone after leaving the Treasury Department. The Mexican government’s welfare program for Citigroup and other foreign investors continues: In 2003 government subsidies to private banks (more than 85 percent of them now owned by foreigners) were almost three times those spent on roads, schools and other infrastructure.

NAFTA was only the beginning. The Clinton/Republican alliance then pushed through the WTO agreement and the subsequent deal with China that traded off more US industrial jobs in exchange for protections for US investors in that huge Asian market. Not only has this produced a massive trade deficit with China and further downward pressure on US wages, it has also sent some 250,000 jobs from Mexico to China. The ubiquitous Citigroup, with banking operations in 100 countries, is now busy building its Chinese banking empire–with Chinese partners.

That well-connected people who move in and out of government and business act in ways that benefit their class and take advantage of their contacts to further their own interests is neither illegal nor new. That’s the way class privilege works. Thus, it is unlikely that Dick Cheney ever ordered anyone at the Pentagon to give a huge sole-source contract to Halliburton. He did not have to. Procurement officers already knew the relationship between the company and the Vice President. And Cheney’s promotion of more funds for the military and for the war in Iraq in particular was bound to benefit the world to which he belonged–his circle of rich and powerful people who would always be there for him and his projects.

There are of course important differences between the ways the elites of the different parties promote the Davos agenda. The preferred instruments of Rubin Democrats are the economic levers of the US Treasury, the IMF, the World Bank and other international financial institutions. Rumsfeld/Cheney Republicans prefer the Defense and Energy departments. The Rubin mode is certainly less lethal and probably more effective. Still, Davos relies on the Pentagon to protect its class privileges with a worldwide web of military bases, training schools and the always-present threat to send in the Marines. It’s worth remembering that virtually the only section of Saddam Hussein’s law still untouched by the US occupation is its oppressive labor code.

But the twin pillars of the US superpower–the Pentagon and Wall Street–are slipping into their own crises and soon may not be able to provide the military and economic muscle for the Davos agenda.

The crisis on the military side involves blowback from the overreach in Iraq. Bush, Cheney and Rumsfeld–despite their thick transnational corporate connections–have created a disaster for Davos. The war has unleashed an army of enemies of Western modernization that is making global corporations nervous. Two years ago the wiser heads at Davos were appalled at Cheney’s delusional report on the Bush Administration’s progress in turning the Middle East into a shopping mall–however much they might have sympathized with the objective. Today the mess in Iraq has revealed to Davos both the incompetence of the American governing class and the unwillingness of the American electorate to make the sacrifices necessary to act as security police for the world’s rich and powerful.

The looming economic crisis comes from the unsustainable US external debt. For more than a quarter-century, we Americans have been buying more from the rest of the world than we have been selling it, and borrowing from abroad to make up the difference. The resulting trade deficit has been a major engine of global growth under Davos’s management. But common sense and simple arithmetic tell us that even the United States cannot go on much longer spending more than it is earning.

When the day of reckoning comes, high interest rates and a falling dollar will force us Americans to rebalance our trade by cutting the price of what we sell and raising the price of what we buy, lowering real incomes. The crisis in the nation’s trade sector will be transmitted to the rest of the economy, made vulnerable by overindebted consumers, overleveraged pension funds and overpriced houses. Thanks to George W. Bush’s reckless fiscal deficits, the government will have less ability to overcome an economic crisis through borrow-and-spend, as it did in the last economic downturn. With the appetite for America’s IOUs diminishing, US politicians will have their hands full dealing with rising energy costs and the tottering finances of healthcare, education and pensions.

The basics of a harder-times scenario are not much in dispute. The debate is between those who foresee a hard landing and those who believe that the world’s central bankers will somehow figure out a way to avoid a global financial meltdown. But hard landing or soft, even the staunchest supporters of globalization admit that lower living standards are already in the cards. N. Gregory Mankiw, who as Bush’s chief economist famously praised the offshoring of American jobs, recently acknowledged that US reliance on foreign savings to support its consumption means a “less prosperous future.”

Financier Warren Buffett reaches the obvious conclusion: We are headed for “significant political unrest.” Democratic Senator Max Baucus, a staunch free-trader, recently told Chinese business executives that unless they cut their country’s trade deficit with America “US politics will become unmanageable.” New York Times columnist and Davos champion Thomas Friedman, who also sees the writing on the wall, suggests dividing political parties by economic class, with Republican Wall Street joining with Democratic Hollywood against disgruntled working-class “populists” in both red and blue states.

But working-class disgruntlement is likely to go beyond Freidman’s stereotype of uneducated losers. The outsourcing and downsizing of opportunities is already adding to the insecurity of people much further up the skill ladder. There are signs that the anxiety is spreading to the business class as well; within organizations such as the National Association of Manufacturers, the owners of smaller and medium-sized businesses, who still depend on an American workforce, are beginning to dissent from the once united front in favor of globalization.

Resistance to Davos is also growing in our own hemispheric neighborhood. Latin American oligarchs who prospered by selling their countries’ assets and people to transnational investors have been ousted in Brazil, Argentina, Venezuela, Uruguay and Bolivia. In Mexico, which is having a presidential election this July, a leftist critic of NAFTA leads in the polls. The Party of Davos may not be over, but the rest of the world seems less willing to foot the bill.

Here in America, the coming unrest could turn right as well as left. The Republican Party is hopelessly tied to the multinational priorities of the US business elite, but its managers are skilled at stoking nationalist resentment among the working-class victims.

In the two-party system the burden therefore rests on the Democrats’ ability to produce leaders who are not co-opted by the Party of Davos. Given the current crop, our chances may not seem great. But leaders are often produced by the times. As globalization’s squeeze on ordinary Americans continues, the political price will rise for those who continue to give priority to bringing Burger King to Baghdad over healthcare to Baltimore. It’s worth remembering that Franklin Roosevelt, who was as elite and privileged as one could get, responded to the economic crisis of his time by becoming–as they muttered in the best clubs–“a traitor to his class.”

Ten years ago, the North American Free Trade Agreement was sold to the people of the United States, Mexico and Canada as a simple treaty eliminating tariffs on goods crossing the three countries’ borders. But NAFTA is much more: It is the constitution of an emerging continental economy that recognizes one citizen–the business corporation. It gives corporations extraordinary protections from government policies that might limit future profits, and extraordinary rights to force the privatization of virtually all civilian public services. Disputes are settled by secret tribunals of experts, many of whom are employed privately as corporate lawyers and consultants. At the same time, NAFTA excludes protections for workers, the environment and the public that are part of the social contract established through long political struggle in each of the countries.

As Jorge Castañeda, Mexico’s recent foreign secretary, observed, NAFTA was “an accord among magnates and potentates: an agreement for the rich and powerful…effectively excluding ordinary people in all three societies.” Thus was NAFTA a model for the neoliberal governance of the global economy.

The business-backed politicians who pushed the agreement through the three legislatures promised that NAFTA would generate prosperity that would more than compensate “ordinary” people for its lack of social protections. Foreign investors would make Mexico an economic tiger, turning its poor workers into middle-class consumers who would then buy US and Canadian goods, creating more jobs in the high-wage countries.

But as soon as the ink was dry on NAFTA, US factories began to shift production to maquiladora factories along the border, where the Mexican government assures a docile labor force and virtually no environmental restrictions. The US trade surplus with Mexico quickly turned into a deficit, and since then at least a half-million jobs have been lost, many of them in small towns and rural areas where there are no job alternatives.

Meanwhile, Mexico’s overall growth rate has been half of what it needs to be just to generate enough jobs for its growing labor force. The NAFTA-inspired strategy of export-led growth undermined Mexican industries that sold to the domestic market as well as the sixty-year-old social bargain in which workers and peasant farmers shared the benefits of growth in exchange for their support for a privileged oligarchy. NAFTA provided the oligarchs with new partners–the multinational corporations–allowing them to abandon their obligations to their fellow Mexicans. Average real wages in Mexican manufacturing are actually lower than they were ten years ago. Two and a half million farmers and their families have been driven out of their local markets and off their land by heavily subsidized US and Canadian agribusiness. For most Mexicans, half of whom live in poverty, basic food has gotten even more expensive: Today the Mexican minimum wage buys less than half the tortillas it bought in 1994. As a result, hundreds of thousands of Mexicans continue to risk their lives crossing the border to get low-wage jobs in the United States.

Canada, which since 1989 has had a similar trade agreement with the United States, and which does much less business with Mexico, was less directly affected. But NAFTA strengthened Canadian corporations’ ability to threaten workers and governments with moving south, helping undermine the country’s traditionally strong labor and social standards.

In all three countries NAFTA has worsened the distribution of income and wealth. While ordinary people paid the costs, the benefits went to the continent’s “rich and powerful.” Canadian and US corporate investors got guaranteed access to Mexico’s cheap labor as well as its privatized public assets. Mexican elites brokered the deals. In one example, well-connected Mexicans bought the country’s second-largest commercial bank from the government for $3.3 billion and sold it to Citigroup for $12.5 billion.

Yet despite its failures, NAFTA set in motion the economic integration of Canada, Mexico and the United States, which cannot now be stopped. Every day, more intracontinental connections in finance, marketing, production and other business networks are being hard-wired for a consolidated North American market. Ford pickup trucks are assembled in Mexico with engines from Ontario and transmissions from Ohio and Michigan. Canadian, Mexican and US investors have created a labyrinth of interconnected corporate assets. After a temporary post-9/11 slowdown, the cross-border movement of people–unskilled workers, educated professionals, retirees–continued.

Expanded markets require expanded rules. Out of public sight, the rulebooks are being filled in by NAFTA tribunals, trigovernmental commissions, administrative judges. Business-supported academic centers are humming with new proposals, ranging from guestworker programs, to the privatization of Canadian water and Mexican oil, to continental business tax policies. As a former Canadian ambassador to the United States recently commented, “Few days go by without new ideas for deepening NAFTA.”

But while corporate business and its political clients are organized continentally, progressives are not. One reason is that the opposition to NAFTA in all three countries was in large part rooted in economic and political nationalism. The political heat that almost defeated the agreement in the US Congress was fueled by the specter of American jobs moving to Mexico. The Canadian opposition painted NAFTA as a threat to Americanize Canadian culture. In Mexico, opposition was rooted in its people’s historic mistrust of Yankee imperialism.

Once the fight over NAFTA was settled, opposition groups moved back to domestic issues or moved on to defend against neoliberalism in other global settings, such as the proposed Free Trade Area of the Americas and the new round of World Trade Organization negotiations. These are important battles, but the capacity of North American activists to influence these negotiations is marginal. For example, if the FTAA is permanently derailed, it will not be over a lack of social protections but because Latin American and US business interests cannot make a deal.

Back home, however, North American opponents of neoliberalism–because they can be a force in the domestic politics of all three nations–have more leverage to develop a socially responsive model of economic integration between rich and poor economies. Indeed, given the influence of the United States in setting the rules for the global economy, a visible, sustained challenge to the NAFTA model here may be the most important contribution progressives on this continent can make to the building of a more just global economic system.

A continental progressive movement would build on its existing infrastructure in each nation–labor, environmentalists, human rights activists, progressive churches and populist legislators–and the fact that the majority of ordinary citizens in all three nations want a market system with social protections.

One initial organizing step might be to connect existing demands to rewrite NAFTA. For example, over the past year Mexican farmers demonstrated throughout the country–including breaking down the door to the Mexican Congress–demanding that NAFTA’s agricultural provisions be changed. Had US and Canadian small farmers, labor unions and environmentalists joined them with their own demands, the Mexican government would not have been able to isolate the farmers with the argument that changing NAFTA is politically impossible.

A new continental agreement could include financial assistance from the United States and Canada to Mexico for building the economic and social infrastructure it needs for growth, just as the European community has redistributed funds to its poorest members in order to create a stronger and more balanced economy. Continentwide enforceable labor, human rights and environmental protections ought to be established to prevent the erosion of living standards in Canada and the United States, and to insure that Mexican workers share in the benefits of rising productivity. Provisions of NAFTA that erode the ability of the local public sectors in all three countries to promote the welfare of their citizens should be stricken.

Progressive legislators in all three countries could begin working out proposals covering issues such as corporate governance, public health and safety, and investment in education that could be simultaneously introduced in all three capitals. A continental labor organizing campaign against a single employer could have an electrifying effect–demonstrating that workers in Canada, Mexico and the United States have more in common with one another than with the CEOs who may share their formal nationality.

Creating a continental political consciousness does not mean forming one nation. Few are ready for that–particularly the majority of Mexicans and Canadians appalled by the US governing class’s current imperial obsessions. But despite all the obvious difficulties, if progressives do not want to see a continental society built on NAFTA’s reactionary template, they have little choice but to grasp hands across the borders and work together to build an economy that serves the continent’s “ordinary” people.

Three years ago the Institutional Revolutionary Party (PRI) lost its seventy-one-year grip on Mexico’s presidency. The party was written off as an authoritarian, inward-looking dinosaur, made obsolete by the country’s opening to the global economy. Mexico’s new president, ex-Coca-Cola executive Vicente Fox, was both symbol and substance of this hope for a prosperous, market-based future.

The PRI is back. It won almost twenty more seats in the July 6 election for the 500-member Chamber of Deputies, Mexico’s lower house. With 224 members, the PRI will be once again the largest bloc in the Mexican Congress. The leftist Democratic Revolutionary Party (PRD) gained forty-one seats for a new total of ninety-six. Fox’s right-of-center National Action Party (PAN), lost about fifty, and will be down to 153.

The election was all about the economy. During his presidential campaign Fox promised voters that the Mexican economy would grow at the rate of 7 percent a year throughout his six-year term. But since passage of the North American Free Trade Agreement, Mexico’s growth has depended on exporting to a robust US market, which started to slump shortly after he took office. Now, midway through his term, the country’s growth has averaged less than 1 percent. Add to the political equation the more than 200,000 jobs that have been lost to lower-wage China, and the fury of small farmers being blown away by the post-NAFTA invasion of their markets by US and Canadian agribusiness, and you are left with a large number of unhappy voters.

Having failed to produce jobs, Fox had hoped for a deal with George W. Bush that would make it easier for Mexico’s unemployed to migrate north. Bush, whose business constituency was eager to increase the pool of low-wage labor, and who shared Fox’s conservative values, seemed interested. But after 9/11, the notion of further opening up the border was a political nonstarter.

Abandoned by Bush, Fox made a last, desperate effort to repair the PAN’s fortunes by showing his independence from Washington. He refused to use Mexico’s Security Council vote to support Bush’s Iraq adventure. But although an overwhelming majority of Mexicans opposed the war, support for Fox’s foreign policy was trumped by anger over the empty lunchpail.

The charming and charismatic Fox is still well liked and gets credit for being personally honest. But as one voter told the New York Times, “The people still live with the same corruption. When we were with the PRI, we knew they robbed us. But at least there were more jobs. We lived better.”

The defeat of the PAN reflects the way Mexico’s neoliberalism has tended to devour its own. Former President Carlos Salinas–the Harvard-trained economist who in the early 1990s elbowed aside the old PRI dinosaurs and talked his country into NAFTA–is the most despised political figure in modern Mexican history. His successor, Ernesto Zedillo, is finished; he presided over the mid-’90s peso crisis and is widely blamed by the party rank and file for its 2000 disaster. Now Fox, who vanquished the PRI, has been betrayed by his own naïve faith in laissez-faire.

All this should be good news for a resurgent PRD, which has been crippled by internecine war for a decade. The party’s leading officeholder, Manuel Lopez Obrador, Mexico City’s mayor, has become the country’s most popular politician by creating jobs with public works and by providing assistance to the elderly. He may be Mexico’s version of Brazil’s President Lula and would certainly be the favorite if the election were held today. Unfortunately, Obrador’s prospects will be limited by the PRD’s narrow base, concentrated in Mexico City and a few of the poorest states.

Moreover, like the left in the rest of North America, the PRD may be increasingly disadvantaged as elections become more Americanized–that is, more costly, more dependent on business contributions and less appealing to the average citizen. Already the American disease of low voter participation seems to have seeped across the border; turnout in congressional elections has fallen from 61 percent in 1991 to 41 percent this July. And the competition for money is becoming a political issue itself. The Fox Administration is currently under investigation for allegedly taking illegal campaign contributions from the United States. A few days before the election, the former Mexican ambassador to Cuba charged that Miami Cuban-Americans had helped finance the Fox campaign in 2000, which he suggested could explain Fox’s reversal of Mexico’s traditional friendliness toward Cuba.

Whatever the truth of these specific allegations, we should not be surprised if NAFTA’s common market for goods and money is also creating a common market for politicians.

At the Quebec Summit of the Americas, President Bush said he wants a free-trade pact for all the Western Hemisphere modeled on the North American Free Trade Agreement. But NAFTA is a deeply flawed guide to economic integration, and especially disappointing for those in Mexico worried about the growing development gap not just between their country and the United States but also within Mexico [see Jerry W. Sanders, “Two Mexicos and Fox’s Quandary,” February 26]. Even before he took office, Mexican President Vicente Fox offered a bold program to help close this gap, but many of his more promising ideas–for regional development funds and increased infrastructure investment–have since fallen off the US-Mexico agenda. Indeed, what emerged from the Fox-Bush February meeting was a potentially new corporate bargain: opening up Mexico to US oil companies in return for regularizing Mexican migrant labor in the United States.

To stimulate thinking on an alternative agenda, The Nation invited Walter Russell Mead, a senior fellow at the Council on Foreign Relations, to offer his ideas, and we solicited responses from Jeff Faux, president of the Economic Policy Institute, and Angelo Falcón, senior policy executive at the Puerto Rican Legal Defense and Education Fund, a national civil rights organization. –The Editors

WALTER RUSSELL MEAD

Vicente Fox’s election as president of Mexico may be one of the most important legacies of the North American Free Trade Agreement. But for Fox–and for the many US, Mexican and Canadian citizens who went to protest at the recent Quebec Summit of the Americas–NAFTA is unfinished business. NAFTA may have helped break the stranglehold on power of the ruling Institutional Revolutionary Party (PRI), paving the way for Fox’s election. It also may have greatly expanded trade between the United States and Mexico, linking Mexico more closely to the successful US economy.

But for all these accomplishments, NAFTA has failed to raise the living standards of most Mexicans, and it has so far failed to deliver the large-scale flow of capital Mexico needs to create jobs for the many young Mexicans entering the labor force. Real wages in Mexico are 26 percent below their 1981 levels, and dropped steadily after the inauguration of NAFTA. Hundreds of thousands of Mexicans still cross US borders each year in a desperate search for work.

Not satisfied with NAFTA as it is, Fox soon after his election offered a bold program for making NAFTA into something more like a North American economic community. Fox called for a freer flow of immigrants to the United States, generous development funds and a new multilateral approach to stopping the drug trade. Across the border in this country, these ideas were met with a dismissive silence, reflective of a fatigue born of the bitter struggles over NAFTA’s passage in 1993.

Yet it would be a mistake to turn our backs on the goal of a more prosperous and democratic Mexico or on Fox’s ideas for a new partnership. Even if his proposals in their current form are political nonstarters, there are other things the United States, Canada and Mexico can do together that would dramatically change Mexico’s economic outlook and do for Mexico what the European Union did for countries like Portugal and Spain: Give ordinary Mexicans the chance to build something like a First World standard of living.

§ Massive infrastructure investment. The first thing Mexico needs is private investment in highways, water-treatment facilities, hospitals, power plants and airports. In Europe they did this with taxes. That won’t, of course, happen here. But we can accomplish the same goal by persuading private capital to invest in Mexican infrastructure projects on a massive scale. So far, the efforts have been disappointing. Corruption makes projects more expensive than they should be, and Mexico’s poverty makes it hard to make money from infrastructure.

We can make these investments more attractive in two ways. First, just as the US government encouraged the rail companies to build transcontinental lines by awarding them land along their routes, Mexico could be encouraged to give construction companies the right to develop land beside, say, the exit ramps of a new freeway or next to a new airport. Doing so would help make these investments profitable. To cut down on corruption, we could create NAFTA boards to oversee and audit these projects. Mexico, the United States and Canada would each name one-third of the board members. Giving Mexico an equal say with its two NAFTA partners would preserve the country’s pride; giving a majority of seats to non-Mexican partners would limit the ability of Mexican politicians to siphon off the money.

To cut costs further, NAFTA countries could jointly guarantee the bonds of companies investing in approved infrastructure projects. This would lower total costs and make the investments more profitable. It is easier to win political support for loan guarantees than for direct aid programs, and several additional steps could be taken to gain the necessary political support for such an infrastructure initiative. Thus, for example, we could require that the projects funded under this initiative meet certain environmental standards and that contractors participating in them observe basic labor rights. Some portion of the loan guarantees should be reserved for projects that address serious environmental problems in Mexico, ranging from water purification to waste disposal and the adoption of more environmentally friendly technology in the power industry. In addition, we could require that a proportion of the equipment and materials used by the projects be purchased in the United States and Canada, creating new markets for US- and Canadian-made goods–and new jobs for US and Canadian workers. Tax revenues and other benefits from these orders and jobs would help offset the cost of the loan guarantees.

Labor hated NAFTA, but this NAFTA II approach is more worker-friendly. With more jobs in all three NAFTA countries, new infrastructure in Mexico, improved environmental and labor standards, and little or no cost to US, Canadian or Mexican taxpayers, what’s not to like?

§ Regional retirement program. Along with such an infrastructure program, the three NAFTA countries could embark on a regional retirement program–a series of measures aimed at facilitating and promoting the voluntary relocation of retired US and Canadian citizens to Mexico. In the next thirty years, more than 100 million Americans will turn 65. Many will have a hard time affording a comfortable US retirement. One cheap and relatively easy part of the solution would be to let retirees follow the sun over the border by extending their Medicare coverage to Mexico, where the cost of living is much lower.

By reimbursing Medicare-eligible patient expenses–perhaps at a discount to high US rates–at inspected and approved healthcare facilities in Mexico, and by negotiating with the Mexican government to insure adequate legal protection for retirees and their property, the United States could open the doors for, ultimately, millions of aging Baby Boomers to enjoy affordable and comfortable retirements south of the border. The effects on Mexico would be transforming: If 10 percent of the new retirees were to go to Mexico, the annual economic boost of their spending and Medicare payments alone would be roughly equal to 50 percent of Mexico’s current GDP. Mexico would also gain from an increased demand for both skilled and unskilled healthcare workers.

§ Currency reform. There’s one more thing the United States could do for Mexico. Increasingly, many Mexican businessmen, including several high-level Fox appointees, are talking about “dollarization”–getting rid of the Mexican peso and making the US dollar legal tender in Mexico. The main reason for doing that would be to bring down interest rates: A weak, inflation-prone peso forces Mexicans to pay much higher rates than Americans. It is virtually impossible to start a new business or expand an already existing one without access to reasonably priced credit, and this, as Fox knows, has stunted Mexico’s economic development.

But dollarization is not just about business. High interest rates mean Mexican families can’t do something Americans take for granted: get a mortgage. Helping Mexico dollarize would allow millions of Mexicans to join the middle class and build their own homes. That in turn would create new jobs in Mexico–and support Mexican economic growth that doesn’t depend on exports to the United States. The costs again would be minimal, and the benefits huge.

Dollarization is not the only possible approach to Mexico’s currency problem. Like all approaches to currency issues, it has problems, and some of the problems are serious. Other alternatives exist: Mexico, for example, could (with US assistance) help establish a regional currency zone, with willing participants from Central America and the Caribbean.

The decision on currency is ultimately one that Mexico must take; the United States should stand ready to work with the democratic Mexican government to support any feasible Mexican initiative that helps ordinary people and small businesses gain the kind of access to credit markets that is currently largely restricted to big business and the elite.

§ Legal reform. For any kind of currency reform to benefit ordinary Mexicans, it must be linked to legal reforms that give Mexico the basis for a credit system that people can use for purposes like home mortgages and small businesses. In Mexico, as in many countries with strong traditions of one-party rule, courts and laws do a poor job of protecting the rights and property of average citizens. This must change. A wide range of reforms are needed in how laws are written and how courts work. As Mexican politics shifts onto a more democratic path, legal reforms to protect the rights and property of ordinary citizens, and to provide the legal basis for Mexican versions of institutions like Fannie Mae, will become a top priority. The US government should lend its wholehearted support to these reforms and encourage the international financial institutions to provide both technical assistance and financial help as Mexico moves toward democratic rather than pure neoliberal reform.

This four-part program–infrastructure investment, Medicare transportability, currency reform and legal reform–would create millions of Mexican jobs, raise wages and living standards, cut illegal immigration, improve the environment, advance labor standards and create new jobs in the United States and Canada. No giant sucking sound, no new taxes. As surely as it once won its independence, Mexico will someday win its war on poverty and join the First World. Already, Mexico today has a more productive economy and a larger proportion of well-educated workers than did many members of the European Union after World War II. With a little help from its friends, Mexico can join the First World for keeps much sooner than most people think–quite possibly before the Gen Xers head south to retire.

JEFF FAUX

Walter Mead is right that the election of Vicente Fox opens up the possibility for a new deal with Mexico, one that reflects the reality of the converging economies of North America. But his “NAFTA II” does not sufficiently address the critical failure of NAFTA I–the weakening of economic democracy in all three countries.

All markets are nested in political arrangements that set the rules. The rules created by NAFTA are imbalanced; they encourage capital mobility by extending trinational protection to investors, while protections for workers and the environment are left to national governments, and consequently eroded by the increased competition for investment. One result has been a rise in inequality and insecurity among working people in all three countries–especially in Mexico, where the rich have gotten a lot richer while some 40 percent of the population live on $2.80 a day or less.

Mexico will certainly need more foreign capital to close the gap in living standards between itself and its neighbors. But it is already host to enormous amounts of investment that have failed to trickle down. Moreover, much of Mexico’s public infrastructure problem stems from chronically deficient public revenues in a country where the rich–foreign and domestic–don’t pay taxes. As a recent New York Times article describing conditions in the border city of Acuña put it: “Mexican workers earn such miserable wages and American companies pay such minimal taxes that its schools are a shambles, its hospital crumbling, its trash collection slapdash, and its sewage lines collapsed. Half of Acuña’s 150,000 residents now use backyard latrines.”

Mead’s notion that presumably more virtuous US and Canadian bureaucrats sitting on a trinational board would “limit the ability of Mexican politicians to siphon off the money” reveals a naïveté about the root cause of corruption in Mexico. Mexican public officials are not intrinsically less honest than their counterparts to the north. Seven decades of one-party PRI rule created entrenched private oligarchies that treat the government, including the military and police, like a branch of the family business.

For example, credit for small business and consumers did not dry up because courts suddenly decided not to protect private property. Government banks were sold off to oligarchs who drained their assets. As a result, despite the influx of foreign capital, interest rates in Mexico are among the highest of the major countries in Latin America or Asia. These new “market oriented” banks are now getting a massive government bailout, the cost of which is crowding out desperately needed public expenditures on education, health and infrastructure.

To a large extent, Mexico’s crony capitalism has rested on PRI-controlled trade unions and farmer organizations that have refined the “sweetheart contract” to a fine art. In some cases, workers do not even know the name of the union that collects their dues and have been told by the Labor Ministry that they have no right to the information. Workers who have tried to organize independent unions are harassed, beaten and sometimes killed.

Mexico’s system has long been politically supported by investors north of the border. Whatever it cost them in bribes, the system has been more than made up for by providing a cheap, compliant labor force.

Last year’s defeat of the PRI’s candidate for president by Fox–former CEO of Coca-Cola Mexico and leader of the National Action Party (PAN)–has crippled the PRI’s power but not yet changed the system. The PAN itself is highly conservative and business-oriented, the PRI maintains control in most Mexican states, and economic and military power remains in the hands of the oligarchs.

But still, Fox appears committed to making the country more democratic. Moreover, he has proposed that NAFTA take as a model the European Union, in which labor and social protections are embedded in the common market. This opens up possibilities for democratizing the NAFTA relationship. A connected debate in all three countries over the future of the evolving continental economy could create a cross-border constituency to counterbalance the powerful but narrow set of political interests that supported NAFTA I.

Indeed, Fox has begun practicing his own version of new continental politics. He has declared his intention to be the leader not only of Mexico but of the millions of Mexicans living in the United States. In his February meeting with George W. Bush, Fox put on the agenda the treatment of Mexican workers in the United States. This raises a question: If the treatment of Mexican workers in the United States is a continental political question, why not the treatment of Mexican workers in Mexico? Or the treatment of US workers in the United States, where the erosion of workers’ rights was the subject of a recent Human Rights Watch report?

The next stage for NAFTA therefore should focus on economic democracy–establishing continental standards for labor and human rights, and making them enforceable. As an incentive, the United States and Canada could commit themselves to sustained development assistance to Mexico for education, infrastructure and environmental cleanup–not just along the US border, but investments in clean air and water in Mexico City and other places in the interior, where pollution is even more threatening to people’s health. An increase in legal immigration linked to greater Mexican efforts to stem illegal crossings could also be offered. And the United States could forgo the annual ritual of certifying that Mexico is making an effective good-faith effort in the war against drugs. Inasmuch as neither Republicans nor Democrats have any intention of decertifying Mexico, the process serves no useful purpose. It humiliates Mexico and perpetuates the myth that the source of the US drug problem lies there rather than within US borders.

For its part, Mexico should commit itself to enforceable labor rights–including trade-union democracy–and workplace and environmental standards that would rise toward US and Canadian levels as Mexico’s per capita income rises. The problem of judicial corruption in Mexico can at least partially be addressed by “continentalizing” the enforcement of these standards, just as we have done for the protection of investor rights. Citizens of any country would be able to bring action against violators in the courts of any other, and trade sanctions could be invoked against both violating companies and violating governments.

This kind of proposal could attract a trinational constituency. For Canadians, a social vision for NAFTA would help protect their generally higher social standards from erosion. For both Canadian and US labor unions, the prospect of an independent union movement in Mexico, allied with a movement for better conditions throughout the continent, could be particularly attractive. In Mexico, it would be in Fox’s political interest–as well as that of Mexico’s third party, the left-of-center Democratic Revolutionary Party–to break the power of the old PRI-dominated unions. Certainly, among average Mexican families, the combination of social investment and an elevation of workers’ rights would be popular.

Whatever their possible merits, dollarization and the promotion of retirement homes in Mexico should not be the next priority for North American economic integration; more urgent is a better deal for the continent’s workers.

ANGELO FALCÓN

Walter Russell Mead is no fan of NAFTA, and he sees a need to go beyond outmoded traditional left proposals. But his attempt to outline a progressive yet pragmatic approach to “fix” NAFTA in ways that would help “give ordinary Mexicans the chance to build something like a First World standard of living” seems like a surrender to the very forces that created the problems in the first place.

His four-point program of infrastructure investment, regional retirement, currency reform and legal reform appears to be an effort to come up with a politically marketable approach in the United States for supporting Mexico’s economic development. The problem he seeks to confront head-on is overcoming the “dismissive silence” in the United States that Mexican President Vicente Fox received in response to his reasonable proposal for a more open North American common market.

One problem with Mead’s approach is that he offers such a dismal picture of Mexican society that he undermines his own arguments. This is a society where “corruption makes projects more expensive than they should be,” where “poverty makes it hard to make money from infrastructure” and where “courts and laws do a poor job of protecting the rights and property of average citizens.”

While he argues that his program would address these issues, how this would happen isn’t clear. He talks about stemming corruption through monitoring by “NAFTA boards” that should include Mexico to “preserve the country’s pride”; he would promote profitability through an extensive program of corporate giveaways; he would address Mexican poverty by displacing/”enriching” Mexicans with US and Canadian retirees lured to Mexico with social welfare incentives. Moreover, the recommendations are couched in terms that may be offensive to many Mexicans.

The analysis, like much of what now passes for a pragmatic progressivism, also suffers from its ahistorical nature. There is no discussion of the US role in Mexico’s underdevelopment or of how the United States benefits from this economic asymmetry. This amnesia conveniently allows for an evasion of responsibility and for a lack of understanding of how we got to where we are today. US foreign policy becomes a neutral, pluralist process in search of rational proposals. Social, class and national struggles become nuisances to be explained away rather than the powerful forces of much-needed change that must be understood and harnessed.

Mead might usefully have focused on the reasons behind the “dismissive silence” President Fox’s proposals encountered from US policy elites. Why should anybody be listening to Mead rather than the democratically elected president of Mexico? For an answer to that question, Mead will have to crack open some history books.

For two decades the International Monetary Fund and its major client, the US Treasury, have made privatization, austere social budgets and market deregulation conditions of loans to the world’s poorest nations. The goal has been to turn these economies into models of American-style capitalism, which among other benefits would generate the growth to enable them to pay back the money.

Instead, per capita growth has slowed, debts have piled up, and today these countries are trapped in a downward spiral of poverty and social disintegration. Nations in sub-Saharan Africa, for example, spend more on annual debt repayments than they do on education and health combined. In Zimbabwe–not the poorest nation–real incomes have fallen 37 percent since 1991, 25 percent of the country’s population has HIV/AIDS and a fourth of its national income goes to pay off debts.

International pressure from First World religious, labor and humanitarian groups has pushed a reluctant IMF to provide some debt forgiveness to about forty of the most heavily indebted poor countries. Bill Clinton and Republican Congressman Jim Leach, who chairs the House Banking Committee, have proposed canceling some of the debts owed to the US government. But these proposals would require debtor nations to tighten their belts further in the name of “sound economic policies,” i.e., to reduce labor costs so that they can increase exports to earn enough foreign currency to pay back their loans. Their labor, however, is already dirt-cheap. Add primitive infrastructure and deteriorating public health, and the IMF formula holds out no prospect of these countries growing their way out of their financial holes.

If most of the debt is unpayable, why do their creditors continue to squeeze these destitute nations? Ask the bankers and they will lecture you on the principle of “moral hazard”–the notion that if people are allowed to avoid the consequences of their economic mistakes, they will continue to make them. As an observation about human psychology, this may be reasonable, if oversimplified. But as applied to poverty-stricken societies, it is hazardous morality and bad economics. The people who are being hounded to pay back the loans are not the people who took them out. Much of the debt represents the residue of cold war-era payoffs to corrupt dictators and their cronies who are long gone, having taken the money with them. As Michael Harrington once quipped about foreign aid, such loans were a transfer of resources from “poor people in rich countries to rich people in poor countries.”

Excessive concern with moral hazard flies in the face of the experience of the world’s currently most successful economy. America is the Land of Moral Hazard. We are the world’s largest debtor (we don’t even pay our dues to the United Nations), our people have a zero savings rate and consumer debt is at record highs. More to the point, this is the easiest nation in the world in which to declare bankruptcy and escape the consequences: 1.5 million individuals and businesses do it each year. When they come home from bankruptcy court and turn on the TV, they are bombarded with offers for more loans from companies whose business it is to lend money to people with bad credit.

There is method to this seeming madness. First, in a modern economy supply tends to outrace effective demand for goods and services, so anemic incomes need to be supplemented by credit. Easy credit, moreover, is not only fueling the US economy; by maintaining demand for Asian goods while Asia’s own markets tanked, the US consumer’s cavalier attitude toward debt has saved the world economy from depression.

Second, escape hatches for debtors reflect a sound economic principle: If you really can’t pay, then it is not in society’s interest to have you spend the rest of your life hopelessly trying to work off the purchase of an asset that is now worth less than the value of the effort you are making to pay for it. Bankruptcy law allows you to liquidate the debt by selling off the assets and sharing the loss with your creditors–who, after all, were partners in creating the loan that went sour.

Compare the United States with a nation like Japan, where inadequate bankruptcy protection leaves millions of Japanese stuck making payments on houses and business real estate now worth half the value of the mortgage–paralyzing consumer spending and investment. In America, you can give the key to the bank, move to the next state and start all over again. Indeed, in America the rich get richer precisely by exposing their economic morality to hazard. When the ninety-nine multimillionaires who invested in the now infamous Long Term Capital Management Fund bet wrong on the Russian ruble, the Federal Reserve and the Treasury browbeat the fund’s bankers into lending them even more money to go out and do the same thing again.

If the world’s financiers really want to export American capitalism to the world’s impoverished societies, they should knock off the homilies on frugality and let the poor in on the real secret of US prosperity–debt relief.